Why auction design matters (ft. Nobel economist Paul Milgrom)

**Paul Milgrom** (0:00)
Many of the assumptions that we make in economics are arbitrary for convenience, for simplicity, and they're just wrong. Pacific Bell asked me to look at this proposal by the government. What they had was just a mess and ignored some obvious problems. The last time I went to the FCC, I said, you know, it isn't that hard. Here's how you could do it with linked Excel spreadsheets. And I just handed them the disk. One of the areas that we will be moving into is creating futures markets for compute. Here's the economic problem we're trying to solve. It costs you $20 billion to build a data center. Why don't you build a $30 billion data center? Well, it's because it's very risky. Suppose that next year NVIDIA were to come up with a chip that's 50% faster and uses 30% less electricity.

**Scott Kominers** (0:47)
It's been a huge theme throughout your career, that there's a practical problem that then spawns new theory, that then gives rise to new practical designs. What does it feel like? How does it come about?

**Paul Milgrom** (0:56)
So there are two things you're conflating there, I think. One is that...

**Tim Roughgarden** (1:08)
Hi, everyone, and welcome to First Principles, a series by the team at A16z Crypto. I'm Tim Roughgarden. I'm the head of research at A16z Crypto. And today, we're talking about how prices form in complex markets and how the rules of the game can shape outcomes. Our guest today is Paul Milgrom, the noble lord in economics whose work on auction theory fundamentally changed how we understand bidding, pricing and the role of information in markets. Among many accomplishments, he co-designed the FCC Spectrum Auctions that have enabled many wonderful technologies like 5G wireless, while at the same time generating over $100 billion in revenue for the US government. Paul's ideas have been extremely influential in economics, and in many cases, they map directly onto the mechanism design challenges that arise in on-chain markets and decentralized finance.
Joining us is Scott Kominers, Harvard Business School professor and research partner at A16Z Crypto, as we talk with Paul about his foundational contributions to auction theory and what they reveal about designing better markets. Here's our conversation.
All right. So, Scott, we get to interview Paul Milgrom next. I'm really excited about this. One very humbling thing to do is just go back over all of the different things. Even let's just restrict to the paper writing. Let's put aside the practical impact. Just looking at the papers he's written over his career, and it's just landmark paper after landmark paper. It's like, how can somebody keep this up for this long? It's pretty mind-blowing.

**Scott Kominers** (2:44)
Well, and I'll tell you, not only has he written landmark papers in basically everything in economic theory, but every single thing he's ever worked on is the most exciting thing he's ever worked on. I mean, he just has this incredible energy and love for all of it.

**Tim Roughgarden** (3:02)
I gotta ask, so around the time he won the Nobel Prize along with Bob Wilson, you were actually a co-author on a survey basically of his work as part of that. So can you talk a little bit about the process of writing that and just what was it like?

**Scott Kominers** (3:18)
Oh, it was so fun. It was so much fun. So the Scandinavian Journal of Economics puts out a survey article on the year's economics, Nobel Laureate or Laureates. Tommy Anderson, who was the handling editor and co-author and collaborator with my friend and co-author Alex Tadelboim, sort of network of networks, reached out and basically asked whether five of us together, all of whom had in one fashion or another worked with Paul and or Bob, Bob Wilson, who won the prize jointly with Paul, would work together to write a survey. And it was incredible.
So Alex Tadelboim, Pyotr Dvorak, Mohammad Akbarpur, Shengwu Li, and I sat down to do this.

**Tim Roughgarden** (4:00)
That's quite the dream team right there, so...

**Scott Kominers** (4:04)
I was astounded to be included in the list with those other four.
It was incredible. So first of all, we did our homework, right? We tried, I would say, to read all of Paul and Bob's papers, discovering that even though we thought... One of the weird things is most of them were Milgrom and or Wilson students, all of us had grown up in grad school reading their work, and I felt like I was still discovering I only knew 25% of it. Even on the topics I'm an expert in, right? It was like, oh wait, Milgrom introduced that idea in auctions too? Who knew? What?