Market Design: The Policy Uses of Theory

(paper excerpt)

The use of theory to justify uniform pricing for government-debt auctions has been criticized. The existing theory is not general enough to prescribe the optimal mechanism, so judgment is needed. But this is to be expected (it was also the case with the spectrum auctions). The world is more complicated than theorists' models. If we are to use theory in policy we must learn to live with a bit of extrapolation.

Theory is not always usable. The outstanding policy success of theory, the sale of spectrum rights, is a special case. Subtle as it is, the spectrum market demands far less of rules to underpin it than, say, an equity or a labor market. As China's reforms illustrate, sometimes the extrapolation from simple theory to complex reality is just too big.