Applying Mechanism Design Theory to Allocation Problems in Universities

By Ghosh, Indranil | Journal of Economics and Economic Education Research, May 2013 | Go to article overview

Applying Mechanism Design Theory to Allocation Problems in Universities


Ghosh, Indranil, Journal of Economics and Economic Education Research


NTRODUCTION

The 2007 Nobel Memorial Prize in Economics was awarded to Leonid Hurwicz, Eric Maskin and Roger Myerson for their pioneering contributions to Mechanism Design Theory. The term "mechanism design" understandably has engineering connotations where a machine has to be designed to conform to some set standard. However social and economic decision making can also be easily incorporated into the term "mechanism design" because in essence the phrase "a designed mechanism" can just as easily be applied to providing and sharing the cost of public goods as an example. Initially also referred to as the principal agent problem, mechanism design theory in economics is associated with the concept of a principal or planner designing a "mechanism" by which a set of agents with productive capacities or consumption needs will interact with one another to allocate resources. In this case the principal or planner needs to design a mechanism of interaction among the economic agents such that an appropriate efficient allocation of resources is achieved. An example of an economic system would be the decentralized price mechanism where goods and services are allocated based on prices determined by demand and supply, with the outcome of the allocation being efficient or "Pareto Efficient" as is the standard economic term. In this economic system, a planner could design a mechanism that would alter the decision making authority and the allocation of rewards, in which case it would resemble a socialist economic system. An auction is a designed mechanism that in many ways seeks to replicate the outcomes of a decentralized price mechanism, although the rules of the game are designed differently. Among the more popular auctions that have been used to allocate resources have been the English auction, the First Price auction, the Second Price or Vickrey auction and the Dutch auction (For an excellent description of these auctions and their uses see Cox, Roberson and Smith (1982)). Even though it is theoretically complex, mechanism design has provided a number of useful and important economic applications in recent years in the design of auctions to allocate spectrum bandwidth to mobile phone providers (see Crampton (2002)), auctions to allocate pollution permits to industries to alleviate the problems of acid rain (see Crampton and Kerr (2002)), managerial compensation and incentives (see Melumad, Mookherjee and Reichelstein (1995), voting systems (see Gibbard (1973)), regulation and antitrust policies (see Baron and Myerson (1982), tax systems (see Mirrlees (1986)), lotteries for allocation of students to schools (see Abdulkadiroglu and Sonmez (2003)), and labor and credit contracts (see Bolton and Dewatripont (2005).

As we see from the examples above, the applications of mechanism design are widespread and quite relevant to the functioning of any modern day economy, no matter what the economic system being pursued. In addition to the examples given above, for academics associated with universities and colleges, there is a growing field of practical usage of auctions right in their workplace. Educational institutions usually place limits on the number of students in a particular class. This can lead to an inefficient allocation process since there are always students that are not allocated to their first choice courses, in fact this problem can become serious for students that are at the end of their college education process and need certain classes to graduate, and may find themselves unable to get into that class. Students in many cases also need to take courses in a specific order to satisfy the prerequisites of certain upper level courses, and being unable to get into one of these courses can hinder the progress of the student towards completion of their degree within the standard timeframe. Thus university and college administrators have a special responsibility to ensure that course allocation mechanisms are designed such that students can get into their appropriate courses. …

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