FOUNDATIONAL RESEARCH. Via SCSU Scholars, a James Lileks impression of Leonid Hurwicz's early work.

It’s an eye-glazer, but it perks up nicely at the end when it introduces “The Disturbance,” which sounds like one of those pale psychological thrillers staring Nicole Kidman. He also wrote “Reduction of Constrained Maxima to Saddle-Point Problems,” which sounds like those bizarre pr0n-spam subject lines I have to edit out every day, and “On the Stability of Competitive Equilibrium.” That was so popular he followed it up a year later with “On the Stability of Competitive Equilibrium II,” with Jayne Mansfield playing the part of the Dominant Diagonal, and Tom Ewell as the Aggregate Excess Demand Function.

I just got done teaching some of that stuff. With a good plotting program, it's possible to generate an illustration of hill-climbing in 3-space in which the solution is quite evidently a maximum with respect to the decision variables and a minimum with respect to the shadow prices.

Stability of dynamic systems continues to be an area that rewards careful study. In a two-person, two-commodity exchange economy, it suffices that the excess demand for the numeraire good be negative when the price of the other good is zero and positive when the price of the other good approaches infinity, and that the excess demand function be continuous and strictly increasing. The generalization to large economies is not always straightforward, and there is a lot of work including a few special cases where the Dominant Diagonal has to put the leathers away.

There is more on the incentive compatibility work that merited the Nobel at Marginal Revolution (just keep scrolling) as well as a shorter explanation at Knowledge Problem.

Basic mechanism design models (such as, for example, a contract between a principal and an agent who will exert some effort on behalf of the principal) start from the idea that each individual will maximize his/her value function (utility, profit, whatever), subject to two important constraints -- individual rationality (or participation) and incentive compatibility. The form those constraints take will depend on the specific nature of the relationship being modeled. Given that basis, is there a way to arrange the relationship such that both parties are made better off, and neither party has an incentive to choose a different action? See also Alex's mechanism design post from yesterday.

Put another way, mechanism design is in a lot of ways about institutions. Can we devise an institution in which both parties do things that create the most net benefit? In that sense institutional design is a lot about figuring out what those individual rationality and incentive compatibility constraints are, and what institutions will satisfy them and lead to optimal net benefit.

There's an illustration of the incentive compatibility constraint in action as pro football comes to grips with fan loutishness.

This hasn't gone unnoticed by the NFL, which regularly gathers and shares best practices in crowd control. Among the findings is that there's a direct correlation between season-ticket subscription rates and fan behavior. "If a team has a 10-year waiting list for tickets, most fans don't want to risk losing their season tickets," said Scott Berchtold, a Bills spokesman who used to work for the Green Bay Packers.

Teams have also found that making season-ticket holders accountable for any bad behavior that occurs in their seats--even if it happens when someone else is sitting in them--works. "If we get a bad report, we call the ticket holder and tell them that if there's another problem, regardless of who's sitting in the seats, their tickets will be revoked," said Houston Texans President Jamey Rootes. The team has never had to make a second call. The Bills have started to do the same thing.

The individual rationality constraint, sometimes called the self-selection constraint, also matters.

Personal seat licenses and premium seating tend to price out some of the thugs. Philadelphia's Veterans Stadium was long considered the worst in the league for fan behavior. Cops used to walk through the stands in visiting team jerseys to bait thugs who preyed on visiting fans. Things were so bad that there was a courtroom right in the stadium to arraign the worst offenders. Things have gotten better since the Eagles moved in 2003 to Lincoln Financial Field, which has new luxury suites and nearly 11,000 Club seats that cost $800 or more a game. "The more expensive the experience, the less inclined fans are to ruin it," said Houston's Mr. Rootes.

No doubt some of the Perpetually Aggrieved will seize upon such anecdotes as more evidence that economics is all about rationalizing class oppression. But where institutions evolve (the expression "mechanism design" being a bit infelicitous) to curb excessive behaviors, the possibility remains that what some see as "class oppression" is in fact "efficient living with others."