The Nobel in economic science was awarded to three American economists for creating and developing a sophisticated explanation of the interaction among individuals, markets and institutions.

Their work, called mechanism design theory, has influenced thinking on a wide range of problems in economics and political science, everything from the arrangement of government bond auctions to setting up patent systems and creating new voting procedures.

Leonid Hurwicz, 90, a professor emeritus at the University of Minnesota, initiated the field of mechanism design theory, the Royal Swedish Academy of Sciences said in the citation yesterday for the award, which is not one of the original Nobel prizes and is known as the Nobel Memorial Prize in Economic Science. Professor Hurwicz's work was further developed by two 56-year-old economists who are sharing the prize: Roger B. Myerson, a professor at the University of Chicago, and Eric S. Maskin, a professor at the Institute for Advanced Study in Princeton, N.J.

Professor Hurwicz, who was born in Moscow, started his work in the postwar years at a time when economists and others were heatedly debating whether socialist reforms were possible without a loss of economic efficiency. Those debates tended to be deeply ideological.

Professor Hurwicz was a pioneer in applying a more rigorous, mathematical analysis to those issues. Last year, in a lecture to honor Professor Hurwicz, Professor Myerson said, "Over many years and decades, Leo Hurwicz has worked to show how mathematical economic models can provide a general framework for analyzing different economic institutions, like those of capitalism and socialism, as mechanisms for coordinating the individuals of society."

The field of mechanism design theory strives to systematically take into account the realities of economic life. Adam Smith's "invisible hand" is a powerful metaphor that describes how the market, in theory, will always efficiently allocate scarce resources.

Yet real-world conditions tend to complicate things. Competition is not completely free, consumers are not perfectly informed, optimizing private production and consumption may have social costs, and institutions can strongly shape economic bargaining.

"It's not enough to say perfect competition doesn't work in many cases," Professor Hurwicz said in an interview yesterday. "It should lead us to design economic institutions and mechanisms to bring better outcomes."

The work begun by Professor Hurwicz, and advanced by Professors Maskin and Myerson, gave economists and policy makers new intellectual tools for thinking about how to structure economic incentives and institutions to enhance social welfare. A public good like clean air, for example, is not accounted for in ordinary market transactions. Mechanism design theory provides a framework for determining whether government taxation is called for, and, if so, how to best design such as system.

Mechanism design theory, economists say, borrows ideas from early game theorists like John von Neumann and Oskar Morgenstern and applied them to the creation of more desirable economic arrangements. "They are talking about building economic institutions," said Alvin Roth, an economist at Harvard.

The institutional focus, economists say, is an important contribution. "Economists' most lasting influence comes from the design of institutions," said Robert J. Shiller, a professor of economics at Yale. "It is these mechanisms we use day to day that really matter to our lives."

Both Professors Myerson and Maskin were doctoral candidates at Harvard in the early 1970s, studying under Kenneth J. Arrow, who won the Nobel in economic science in 1972. In an interview yesterday, Professor Maskin recalled reading the work of Professor Hurwicz and being compelled by the potential breadth of the field.

"The subject really grabbed me because it was a wonderful combination of rigorous, careful analysis, but applied to important social issues," said Professor Maskin, who lives in the Princeton house once occupied by Albert Einstein. (Professor Maskin is the third Nobel laureate to have lived in the house; the second was Frank Wilczek, who won the prize in physics in 2004 and is now a professor at the Massachusetts Institute of Technology.)

Mechanism design, Professor Maskin explained, can be thought of as the "reverse engineering part of economics." The starting point, he said, is an outcome that is being sought, like a cleaner environment, a more equitable distribution of income or more technical innovation. Then, he added, one works to design a system that aligns private incentives with public goals.

One recent subject of Professor Maskin's wide-ranging research has been on the value of software patents. He determined that software was a market where innovations tended to be sequential, in that they were built closely on the work of predecessors, and innovators could take many different paths to the same goal. In such markets, he said, patents might serve as a wall that inhibited innovation rather than stimulating progress.

In Chicago, Professor Myerson said he was drawn to the field of mechanism design because it promised a deeper "understanding of the logic of conflict and cooperation at the most fundamental level" that could possibly help "build better social structures."

The work that brought him a share of the Nobel was theoretical research on the optimal design of auctions. His work has served as intellectual starting point for others in setting up complex auctions like that used by the Federal Communications Commission for selling radio spectrum so that the government collects ample funds but also reserves some of the spectrum for public use and small businesses.

In the last few years, Professor Myerson has expanded his vision, doing research, for example, on how to structure voting in Iraq to promote democracy. "Democracy doesn't come by edict, but by institutions and mechanisms that ensure politicians must compete for the trust of voters," he said.


Comment: That part of the research is certainly still in progress...


It might seem a long way from economics, but Professor Myerson said such research was "what a theorist like me can do. I'm trying to raise questions and encourage thinking about things in a more systematic way about how the playing field that we're acting on could be modified to improve the outcome."

The three economists will share the prize money, about $1.56 million in total.