One example is the financial crisis of 2008, the effects of which the world is still feeling even as it endures the economic crash associated with the spread of the COVID-19 coronavirus.
“One thing that this crisis established quite clearly is that financial markets by themselves don’t always produce the outcomes that we would like,” says Maskin, an American economist and 2007 Nobel Laureate, recognised for having laid the foundations of mechanism design theory along with Leonid Hurwicz and Roger Myerson.
“Particularly when there is a financial meltdown that affects the global economy adversely, this goes to show that somehow we have to modify financial markets.”
Regulation of the financial system as one of the global warming solutions
Modifying free market systems - by designing financial regulation that limits leverage, for example – can produce better results. As Maskin explains, this mechanism design theory takes people as they are and tries to reconcile their individual goals with the goals we have as a society.
These principles are particularly relevant regarding global warming, where free markets alone will not provide a solution and there is a need to induce countries to commit to reducing emissions.
“Climate change is not likely to lead to disaster in the next few years, although we are already beginning to see the possible repercussions. But there is a significant risk that if we do nothing, it will lead to catastrophic outcomes down the road, in 50 years’ time, possibly less.
So doing something about climate change is a high priority for the world,” Maskin says.
Reducing carbon emissions working back from the result
The key when designing good mechanisms is to understand the goals, inclinations and behaviors of all these participants – that is, you start with the result you would like and work backwards to figure out how you get there.
Working back from a result of lower greenhouse gas emissions brings us to a mechanism, in the form of an international agreement under which countries commit to reduce their greenhouse gas emissions.
“It’s through such a mechanism that we’ll ultimately solve the global warming problem. So, the potential implications of mechanism design are really quite broad and important,” Maskin says. “In fact, we saw what the free market produces. It produces occasionally a meltdown. We have to modify free market systems, using our mechanism design tools, by for example designing financial regulation that makes sense.”
Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© UBS 2020 The key symbol and UBS are among the registered and unregistered trademarks of UBS.