I. When I first talked about why we model,
in this class, one of the reasons I gave
was to design better institutions. In this
set of lectures we're going to talk about
something known as mechanism design. And
the idea behind mechanism design is that
you formalize an institution. You do so as
follows, you basically decide, here are
the set of actions that people can take,
and here are the payoffs, or the outcomes,
associated with those actions. So in a
sense, you're defining the rules of the
game, the actions people can take, and
what the payoffs are gonna be. Now in
constructing these mechanisms, there's two
features that often arise in social
context that you try to overcome through
the proper writing of a mechanism. The
first one is, hidden actions, so often
times, especially this is true in work
environments, you don't see the actions
people take, you only see the outcomes.
What you'd like to do is you'd like to
write employment contracts and sentence
structures in such a way, that people take
the actions that you want. So even though
the actions are hidden you?d like to write
some sort of mechanism so that the actions
people are going to take, the optimal
actions for people to do are going to be
actions you want. Now there's gonna be
other cases where's it's not actions
you're worried about but its information.
So you may not know someone's type. So,
for example, someone could be high ability
or low ability. Someone could be a safe
driver or a risky driver. And what you'd
like to do is you'd like to write some
sort of contract so that these people
separate out. So you can identify who the
high type people are and who the low type
people are or, who the risky drivers are
and who the safe drivers are. So we
construct these mechanisms. Two of the
problems we want to sort of overcome are
hidden actions, because we can't see what
people are doing, and hidden information.
We can't figure out what type?s people
are, what they like, how risky they are,
how much ability they have, that sort of
thing. So what we'd like to do is figure
out how do we run institutions to overcome
these two problems. So once we get that
core idea in mind, about sort of how we
can use institutions to figure things out
that are hidden, we'll take them, we'll
apply them to some real world examples.
So, the first thing we'll apply it to is
auctions. When we think about auctions,
there's a lot of different ways we can
auction things off. And we'll show how we
can think of these different rules as
mechanisms. Then what we'll do is we'll
show a theorem that shows which of these
rules are best. So do we have an ascending
bid auction, do we have a sealed bid
auction, or do we have something called a
second price auction? So we can use
theory, we can use models to figure out
which of those particular auction rules is
gonna work best. After we do auctions
we'll look at something called public
goods. So public goods are sort of like a
collective action problem, there goods
that everybody benefits the more we have
of, but you'd like everybody else to pay
for them. So things like roads, clean air,
clean beaches, those sorts of things, we'd
all like those sorts of things. Exist, but
we prefer that other people pay for them.
So we'll talk about what a public good is
and we'll talk about how you can use
mechanism design to come up with solutions
to public good problems. Now in doing
this, I'm gonna do it a little bit
untraditionally. So, why don't I refer to
a quote here, Marie Galmont once said,
imagine how physic, difficult physics
would be if electrons could think. So
remember when we talked about modeling
people, how difficult it was. And we had
three basic models that are rational
choice model, we got a psychological
model, and we have rule based models. What
we're gonna do here is we're gonna do
mechanism design the standard way, and the
standard way is to assume that people are
rational. So we're gonna sort of lay out
the basics of mechanism design assuming
rational agents. But after we do that
we'll talk through what if people suffered
from physiological biases or were slightly
irrational Or what if it were the case
that people just followed simple rules
would our same results still follow. So
we're gonna to have a dialogue using
mechanisms design as a framework for
thinking again about how we model people.
Okay, so that's an outline of what we're
going to do. What we're going to do first
is just add some of the basics of
mechanism design, talk about hidden action
information, move on to options, and then
conclude with some discussion of public
good games. All right, let's get started.