Game Theory and Public Policy, SECOND EDITION

Game Theory and Public Policy, SECOND EDITION

Roger A. McCain

This book provides a critical, selective review of concepts from game theory and their applications in public policy, and further suggests some modifications for some of the models (chiefly in cooperative game theory) to improve their applicability to economics and public policy.

Chapter 7: Social mechanism design

Roger A. McCain

Subjects: economics and finance, game theory, politics and public policy, public policy

Extract

The 2007 Nobel Memorial Prize in Economics was awarded to Hurwicz, Maskin, and Myerson for their contributions to social mechanism design. Maskin and Myerson are well known as game theorists, and the scientific background document for the prize (Royal Swedish Academy of Sciences) states “By using game theory, mechanism design can go beyond the classical approach,” so arguably this was the third Nobel for game theory. In 2012 the prize was awarded to Lloyd Shapley and Alvin Roth for mechanisms that match candidates and opportunities in a way that is in some senses both optimal and stable, and the prize committee refers to a number of cases in which the Shapley–Roth mechanism has been incorporated by actual organizations. These examples illustrate how game theory can be integral to the improvement of organizations and policies. “Mechanism design, Professor Maskin explained, can be thought of as the ‘reverse engineering part of economics.’ The starting point, he said, is an outcome that is being sought, like a cleaner environment, a more equitable distribution of income or more technical innovation. Then, he added, one works to design a system that aligns private incentives with public goals” (Lohr, 2007). Much of the work of social mechanism design has been within the scope of game theory, though (like bargaining theory) social mechanism design has a longer history than game theory does. Hurwicz (1973 p. 2) traces the idea to utopian socialism.

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