What Good is Mechanism Design

Arnold Kling and Tyler Cowen pooh-pooh the work that won the latest Nobel Prize in Economics. I tend to stand more in line with Alex Tabarrok who credits mechanism design with inducing a greater appreciation of markets.

More broadly I would say that Incentive Compatibility Constraints (ICC) are the theoretical nail in the coffin for socialism. When I talk with serious socialists, and yes they do exists, ICC is always the backbone of my arguement.

Yes, the market does badly I say - but the question is whether it is even theoretically possible to do better. The sophisticated socialists tends to believe that current incarnations are a bogus and that are more through, scientifically designed socialism would be more successful.

Incentive compatibility constraints show why that it is unlikely.

They also help us out of conspiracy theory traps and frightening pop fiction. The problem I always say with 1984 is that it completely ignores any semblance of incentive compatibility. In what sense is the politics of 1984 consistent with a law enforcement structure that pursues its own personal interests? Who enforces the law upon the enforcers? And the who enforces the law upon them and why don't they all just collude?

Lastly, however, ICC gives a window of insight into dictatorship and helps us think through why claims that Iraqi people must uniformly welcome the US as liberators. If they all hated Saddam then by what means was Saddam maintaining power. All successful power structures must be incentive compatible. There must be some reason why it is not in the best interests of the generals to lead a coup.


That reason is going to be key in establishing a successful government.