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Concept
Mechanism design
Summary
Mechanism design is a field in economics and game theory that takes an objectives-first approach to designing economic mechanisms or incentives, toward desired objectives, in strategic settings, where players act rationally. Because it starts at the end of the game, then goes backwards, it is also called reverse game theory. It has broad applications, from economics and politics in such fields as market design, auction theory and social choice theory to networked-systems (internet interdomain routing, sponsored search auctions).
Mechanism design studies solution concepts for a class of private-information games. Leonid Hurwicz explains that 'in a design problem, the goal function is the main "given", while the
mechanism is the unknown. Therefore, the design problem is the "inverse" of traditional economic theory, which is typically devoted to the analysis of the performance of a given mechanism.' So, two distinguishing features of these games are:
that a game "designer" chooses the game structure rather than inheriting one
that the designer is interested in the game's outcome
The 2007 Nobel Memorial Prize in Economic Sciences was awarded to Leonid Hurwicz, Eric Maskin, and Roger Myerson "for having laid the foundations of mechanism design theory".
In an interesting class of Bayesian games, one player, called the "principal", would like to condition his behavior on information privately known to other players. For example, the principal would like to know the true quality of a used car a salesman is pitching. He cannot learn anything simply by asking the salesman, because it is in the salesman's interest to distort the truth. However, in mechanism design the principal does have one advantage: He may design a game whose rules can influence others to act the way he would like.
Without mechanism design theory, the principal's problem would be difficult to solve. He would have to consider all the possible games and choose the one that best influences other players' tactics.
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