, Volume 13, Issue 1-2, pp 77-100,
Open Access This content is freely available online to anyone, anywhere at any time.
Date: 26 Feb 2009

The human side of mechanism design: a tribute to Leo Hurwicz and Jean-Jacque Laffont

Abstract

This paper considers the human side of mechanism design, the behavior of economic agents in gathering and processing information and responding to incentives. I first give an overview of the subject of mechanism design, and then examine a pervasive premise in this field that economic agents are rational in their information processing and decisions. Examples from applied mechanism design identify the roles of perceptions and inference in agent behavior, and the influence of systematic irrationalities and sociality on agent responses. These examples suggest that tolerance of behavioral faults be added to the criteria for good mechanism design. In principle-agent problems for example, designers should consider using experimental treatments in contracts, and statistical post-processing of agent responses, to identify and mitigate the effects of agent non-compliance with contract incentives.

This paper was first presented in the Jean-Jacques Laffont Lecture, Toulouse, October 2006, and a condensed version was presented on the occasion of Leo Hurwicz’s 90th birthday, April 2007. I am indebted to Eric Maskin for useful comments, to Florian Heiss, Charles Manski, Rosa Matzkin, and Joachim Winter for collaborative research on control of response errors in economic surveys, and to the National Institute on Aging for research support.
An erratum to this article can be found at http://dx.doi.org/10.1007/s10058-009-0085-8