The 2007 Nobel Prize Economic Sciences Hal W. Snarr November, 2007

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007 Photo: Dong Oh Leonid Hurwicz LL.M., Warsaw University, 1938 University of Minnesota Photo: Cliff Moore Eric S. Maskin PhD, Harvard, 1976 Institute for Advanced Study Princeton, NJ, USA Photo: Univ. of Chicago Roger B. Myerson PhD, Harvard, 1976 University of Chicago

Johnny, tell them what they've won! "for having laid the foundations of mechanism design theory" The Prize amount: SEK 10 million ($1.58 million)

The scientific articles: Hurwicz. L. (1960): "Optimality and informational efficiency in resource allocation processes", in Arrow, Karlin and Suppes (eds.), Mathematical Methods in the Social Sciences, Stanford University Press Hurwicz L. (1972): "On informationally decentralized systems", in Radner and McGuire, Decision and Organization, North-Holland Maskin E. (1977): "Nash equilibrium and welfare optimality". Paper presented at the summer workshop of the Econometric Society in Paris, June Myerson R. (1981): "Optimal auction design", Mathematics of Operations Research 6, 58–73. Published 1999 in the Review of Economic Studies 66, 23–38.

What is mechanism design theory? Our lives are governed by mechanisms which make collective decisions while attempting to take account of individual preferences Such mechanisms are designed to deliver the greatest social good despite individuals pursuing their self-interets, rather than general well-being MDT is the art of producing institutions that align individual incentives with overall social goals In 1960 Leonid Hurwicz formulated a general mathematical framework for analyzing institutions implementing collective decision making

What is mechanism design theory? Hurwicz (1972) introduced Incentive-Compatability Myerson (1979, 1982, 1986) developed the Revelation Principle in its greatest generality Maskin (1977)’s “solution” to sub-optimal mechanisms resulted in Implementation Theory Applications: auctions, provision of public goods, optimal regulation, optimal taxes, voting schemes FCC Spectrum Auctions Interviewing newly minted economics PhDs wireless communication services

FCC Spectrum Auction Design Essential features of these auctions ( ) were –multiple rounds, rather than a single sealed bid –Simultaneous, rather than sequential –Reduces the winner's curse Assessing the Auction Design –Extensive Information was revealed by the bidding –Similar items sold for similar prices

Assessing the auction Design –Bidders successfully formed efficient aggregations of licenses When bidders won multiple bands, the bands were adjacent When bidders won multiple regions, the regions were adjacent and on the same band –Tacit collusion was limited –Durations were reasonable The nationwide auction (10) only took one week The regional auction (30) only took two weeks The broadband auction (99) only took 3 months FCC Spectrum Auction Design

Assessing the auction Design –A–Auction sales far exceed the FCC’s expectations, raising $617 million for 10 nationwide licenses $395 million for 30 regional narrowband licenses $7,700 million for 99 broadband licenses –T–The success of these auctions does not imply that alternative designs would be less successful or that success is assured in future auctions –T–The assignment of licenses using this auction design is a huge improvement over alternative designs (lottery or comparative hearings) –M–Market competition is putting the licenses in the hands of those companies best able to use them –F–Firms, consumers, and taxpayers all benefit

References Peter C. Cramton, Peter C.(1997): “The FCC Spectrum Auctions: An Early Assessment” Journal of Economics and Management Strategy, 6(3): Prize Committee of the Royal Swedish Academy of Sciences (2007): Scientific background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007: Mechanism Design Theory, URL: