Developed by Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson (1960 to 1981), who shared the 2007 economics Nobel for the work.
Starts from the outcome wanted and works back to rules, payoffs, and information flows under which people pursuing their own interest produce it.
When to reach for it
Writing the rules others will play by, such as a bonus plan, a bidding process, a transfer-pricing scheme, or a budget allocation procedure.
How it runs
- State the outcome the rules should produce for each kind of participant.
- List what each participant knows that the designer does not.
- Set payoffs so honest reporting serves each participant best.
- Check that taking part beats staying out for every participant.
- Test the rules against how people would actually play them.
Where it sits in SOLVE eX
Go to the source
- Optimality and Informational Efficiency in Resource Allocation Processes, Mathematical Methods in the Social Sciences, 1959 (Arrow, Karlin, and Suppes, eds., Stanford University Press), 1960
- Nash Equilibrium and Welfare Optimality, Review of Economic Studies 66(1); first circulated as an MIT working paper, 1999
- Optimal Auction Design, Mathematics of Operations Research 6(1), 1981