This is a review article of Putting Auction Theory to Work (Cambridge University Press 2004) by Paul Milgrom.

If A is a set of social alternatives, a social choice rule (SCR) assigns a subset of A to each potential profile of individuals' preferences over A, where the subset is interpreted as the set of "welfare optima" A game form (or "mechanism") implements the social choice rule if, for any potential profile of preferences, (i) any welfare optimum can arise as a Nash equilibrium of the game form (implying, in particular, that a Nash equilibrium exists) and, (ii) all Nash equilibria are welfare optimal. The main result of this paper establishes that any SCR that satisfies two properties—monotonicity and no veto power—can be implemented by a game form if there are three or more individuals. The proof is constructive.

We argue that Arrow’s independence of irrelevant alternatives (IIA) condition is unjustifiably stringent because it rules out making a social welfare function sensitive to individuals’ preference intensities. Accordingly, we propose a modified version of IIA, MIIA, that is a necessary and sufficient relaxation of IIA for taking account of intensities. Rather than obtaining an impossibility result, we show that MIIA together with several other axioms (satisfied by virtually all voting rules and social welfare functions used in practice and studied in theory) uniquely characterizes the Borda count (sometimes called rank-order voting) as a social welfare function.

The theory of mechanism design can be thought of as the “engineering” side of economic theory. Much theoretical work, of course, focuses on existing economic institutions. The theorist wants to explain or forecast the economic or social outcomes that these institutions generate. But in mechanism design theory the direction of inquiry is reversed. We begin by identifying our desired outcome or social goal. We then ask whether or not an appropriate institution (mechanism) could be designed to attain that goal. If the answer is yes, then we want to know what form that mechanism might take. In this paper, I offer a brief introduction to the part of mechanism design called implementation theory, which, given a social goal, characterizes when we can design a mechanism whose predicted outcomes (i.e., the set of equilibrium outcomes) coincide with the desirable outcomes, according to that goal. I try to keep technicalities to a minimum, and usually confine them to footnotes.

The soft budget constraint is a syndrome that was identified and studied by Janos Kornai in his analysis of centrally planned economies ( see, Kornai, 1980 ) . The syndrome is said to arise when a seemingly unprofitable enterprise is bailed out by the government or the enterprise’s creditors. In other words, the enterprise is not held to a fixed budget, but finds its budget constraint ‘‘softened’’ by the infusion of additional credit when it is on the verge of failure. Kornai viewed the soft budget constraint as a crucial ingredient for explaining the salient features of socialist economic performance, in particular, the pervasiveness of shortages. One interesting puzzle is why centrally planned economies have been particularly susceptible to the influence of the soft budget constraint; the capitalist world is hardly immune, as the recent financial crisis in Asia attests, but on the whole it has proved less vulnerable. Indeed, the very origin of the soft budget constraint and the mechanism by which it gives rise to shortages and other undesirable effects are also obviously important questions. Although Kornai’s work has long been well known and appreciated, answers to these associated theoretical questions have been hazarded only recently. In Maskin ( 1996 ) , I surveyed some of the initial efforts in this direction, including Mathias Dewatripont and Maskin (1995), which argues that centralization of credit can give rise to soft budget constraints because it facilitates the refinancing of