Encryption to implement mechanism design solutions

Abstract

Encryption - the process of encoding information - mitigates the damage that comes from obstacles to exchange: private information, limited communication, and limited commitment. Here I would emphasize specifically that encryption is a way to implement optimized solutions to bilateral and multi-agent mechanism design problems as smart contracts. To illustrate how such encryption schemes could be relevant to economic applications, I first revisit "classical" problems such as auction design with private values, constrained-optimal hybrid insurance and credit schemes for markets suffering from liquidity problem. The common thread in each of these applications is that messages are kept secret from other agents in a contract and from third parties, communication channels are optimized, and data are secured and immutable. Agents can commit to arrangements and to the way they are implemented, without inconsistencies, even in evolving situations where they would have liked to renege.

I make use in particular of homomorphic encryption, HE, and multi-party computation, MPC, which I will describe in details in the text and concretely implement. I will first decompose and examine the different technological components of encryption, to, by "translating them" into individual tools that I implement for the aforementioned cases, present here a "cookbook" on how to use cryptography technologies to implement mechanism design solutions. I will always keep in mind the various possible combinations of technologies and the engineering trade-offs associated to each, in the hope that economic and policy designers will be able to adapt these recipes to design new solutions to the problems they will be facing. I then provide a more in-depth example of an "end to end" treatment of a complex economic topic, that of fiat monetary anchoring.

I will model it using our mechanism design framework, calibrate it through empirical analysis, and propose concrete policies and designs, leveraging encryption.