BusinessWeek- The Nobel prize “for having laid the foundations of mechanism design theory” was split three ways between Hurwicz, an emeritus professor at the University of Minnesota; and two academics from the next generation who built on his work: Eric Maskin of the Institute for Advanced Study in Princeton, N.J., and Roger Myerson of the University of Chicago. Maskin and Myerson were PhD candidates in applied mathematics at Harvard University in the 1970s.
Hurwicz won the Nobel for creating an intellectual framework that can evaluate the pros and cons of any possible economic mechanism. In a world riven between free markets, managed economies, and the “Third Way,” Hurwicz and his co-recipients offer a neutral, pragmatic system for figuring out which mechanisms work and which ones don’t.
Most write-ups on these Nobelists focus on how their work underpins the design of auctions, such as those for use of the airwaves and the right to emit carbon dioxide. But because the work is fundamental and highly theoretical, it relates to a much wider range of economic issues.
The Nobelists’ work also explains why property rights can be overdone in a capitalist economy. People who own their own companies are tempted to gain an edge by withholding information from each other. That’s why companies hire employees, who tend to cooperate better because they don’t fight over property rights the way outside contractors do, says Myerson. “When it comes to information,” Myerson says, “less property ownership is better.”
So take your pick: moral hazard under socialism, or adverse selection under free markets. In practice, economists have found that free markets are still the better choice because it’s usually easier to tweak the design of markets to minimize adverse selection than it is to expunge moral hazard from centrally planned systems.
