Goethe: Escritor y economista!
In 1797 Johann Wolfgang von Goethe had completed a new poem Hermann and Dorothea, and he was interested in knowing and publicizing its “true worth.” So he concocted a scheme with his lawyer Mr. Bottiger and wrote this in a letter to his publisher:
I am inclined to offer Mr. Vieweg from Berlin an epic poem, Hermann and Dorothea, which will have approximately 2000 hexameters…. Concerning the royalty we will proceed as follows: I will hand over to Mr. Counsel B6ttiger a sealed note which contains my demand, and I wait for what Mr. Vieweg will suggest to offer for my work. If his offer is lower than my demand, then I take my note back, unopened, and the negotiation is broken. If, however, his offer is higher, then I will not ask for more than what is written in the note to be opened by Mr. Bottiger.
To understand this scheme first consider the alternative scenario where the publisher is told the amount demanded. Then the publisher will say yes or no depending on whether his willingness to pay (the poem’s “true worth”) exceeds or falls short of the demand. But then Goethe would never know exactly the poem’s true worth, just an upper or lower bound for it.
With the demand kept secret, the publisher’s incentives remain the same: he wants to agree to a demand that is below his willingness to pay and refuse a demand that exceeds it. Without knowing what that demand is, there is one and only one way to ensure this. The publisher should offer exactly the poem’s true worth.
Goethe had devised what is apparently the first dominant-strategy incentive compatible truthful revelation mechanism. The Vickrey auction is based on exactly this principle and so Goethe’s mechanism makes for a great starting point for teaching efficient auctions.
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