Eric S. Maskin

They say a truly talented individual is gifted in more ways than one. And when you’re listening to the gentle sound of the clarinet, played by Eric Maskin, a professor of economics at Harvard, it’s easy to believe that statement. Born into a musical family, Maskin played music from a young age, but it’s not his musical talent that he’s celebrated for. In his twenties, Maskin wrote an article that formalized the field of mechanism design in economics. This article, recognized by the Nobel Committee in 2007, was inspired by the work of Maskin’s friend and co-laureate Leonid Hurwicz, and it set up conditions under which mechanism design theory can be used to achieve social goals.

Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2007

Mathematics and social awareness, classical music and jazz piano. These are just some of the passions that define who Maskin is and what he does.

"For me, harmony is taking different parts, different lines of music, of economics, of anything, and putting them together in such a way that makes them seem like they belong together,” he says. “Harmonizing is making many parts into a unified whole."

Mechanism design in action, or: The Story of Alice and Bob

Maskin uses a similar approach to his research on mechanism design. He takes different interests and mixes them together to create valuable ideas that enrich our world.

For Maskin, the world has been in need of a helping hand for quite some time. Economics could, for example, highlight how electoral systems might not really be democratic. He mentions the 2003 US presidential election, the outcome of which was determined by the state of Florida. There were three names on the ballot: George W. Bush, Al Gore and Ralph Nader. Of the three candidates Bush won the most votes, but evidence suggests that had Nader’s name not been on the ballot, there would have been a different outcome. “If it had been a head to head contest, Gore would have won quite easily," Maskin asserts. "What you should do is to allow voters to rank candidates, as this would be more likely to lead to a 'true majority winner.'"

"As I went to college in the late 60s and early 70s, it was a time of considerable political and social unrest. I think it was pressed on us all that we had an obligation to think not only about our careers but also about important issues facing the world. I realized that economics was one way of doing that."

Why our voting systems might not be democratic

When he was majoring in mathematics at Harvard, Maskin took his first undergraduate class in economics, where he studied under Nobel Laureate Kenneth Arrow. It was there that he learned about mechanism design, the engineering aspect of economics. "It’s actually reversed engineering," Maskin explains, excited to be discussing the theory to a new audience. "We start with outcomes, we say these are the outcomes we would like to have, and then we work backwards, to figure out a mechanism or an institution, which will generate those outcomes."

“Mechanisms are the set of rules that participants might follow in order to determine an outcome,” he says. “Each participant in the mechanism will, of course, be following their own rules and trying to achieve their own goals – which aren’t necessarily the same as the goals of the mechanism designer.”

Mechanism design goes where markets can’t: environmental policy

One of the biggest challenges in mechanism design is that the goal of the designer doesn’t always match the goals of the participants. For instance, while a government’s goal could be to reduce CO₂ emissions, an electricity company’s goal might be profit maximization. To see whether it’s possible to achieve the designer’s goals through a mechanism, Maskin came up with the Maskin Monotonicity.

"[It’s] a property of the mechanism designer’s goals and the connection of those goals to individual goals, which, if satisfied, means that you can find a mechanism,” he says. “In fact, you could actually follow an algorithm, which would lead you to such a mechanism."

There are many situations where mechanism design can be applied to achieve a socially desirable outcome and solve pressing real world problems. Maskin’s theory has relevance in everything from environmental policy, electoral systems and financial markets. On top of these theoretical potentials, Maskin has had the opportunity to implement his work and three concrete examples demonstrate the far-reaching implications of his ideas.

Mechanism design was central in the design of decentralization and privatization tools in Poland in the 90s. It allowed the Bank of Italy to reform the system of selling treasury bonds. It helped the British government to develop restrictions on CO2 emissions for electricity-generating companies after it signed the Kyoto protocol.

Designing a mechanism to help financial markets

"Mechanism design can be used whenever markets alone are not going to solve all your problems. Whenever markets need a push or a modification or a tweak, mechanism design is there to tell you what modifications to the pure market system might help," explains the economist.

“Instead, you need the government to step in,” he says. “And limit the amount of pollution that electricity companies, people driving their cars, and all of the various polluters put into the atmosphere.”

It’s the mechanism designer’s job to find not only the mechanisms but also the rules. "You want to direct your pollution reduction to the polluters who are most able to make those reductions," he concludes. This means that a designer needs a mechanism that can distinguish multiple players in a system, low-level polluters from high-level polluters for example, and identify where changes and regulations can be most effective in their overall implementation.

Mathematical modeling is at the core of his work. According to a former student, Michael Kremer, Maskin’s work has an elegance to it. He makes different pieces "fit together in a coherent story or model, trying to achieve results that are as general as possible." Maskin achieves this in an almost-artistic way by connecting the abstraction and beauty of math with concrete problems at hand.

The beauty Maskin sees in math is also in music. "Music and math are driven by aesthetic demands,” he says. “Musicians are looking for the most beautiful succession of notes and mathematicians are looking for the most beautiful formula. Music, unlike visual art, has no direct connection with the physical world, it lives in its own world and the same thing is true of mathematics. If there is life on other planets, you can bet that they probably have the same mathematics that we have. It’s not dependent on particular physical space."

"With the innovation and changes of the modern economy, mechanism design could become increasingly important for investors."

Paul Donovan 
Global Chief Economist
UBS Wealth Management