MECHANISM DESIGN: CHANGING AUCTION RULES.

MECHANISM DESIGN: CHANGING AUCTION RULES. The founders of the field of mechanism design received last years Nobel Prize in economics. I have been on the lookout for an explanation of mechanism design. Sebastian Mallaby has an article which gives an example of mechanism design. A typical auction may lead to the winner paying less than it would be worth to the winner. Mechanism designers proposed different rules: “The highest bidder, they proposed, should win the auction, but the price he pays should be the one set by the runner-up. This ends the incentive to bid strategically. Each bidder will reveal what the spectrum is really worth to him, since he knows he won’t pay the price he is naming. The spectrum will end up in the most productive hands, and at a fair price for taxpayers.” I must be missing something because I would think that it would be tempting to bid outlandishly high. If I bid a bazillion dollars (to use Dave Barry’s unit of account), I won’t have to pay it, and if I come in second, one of my competitors will be wiped out.