Mechanism Design Theory
 |
Definition of 'Mechanism Design Theory'An economic theory that seeks to determine the situations in which a particular strategy or mechanism will work efficiently, compared to situations in which the same strategy will not work as efficiently. Mechanism design theory allows economists to analyze and compare the way in which markets or institutions, such as a government, efficiently allocate goods and services given a gap in information between buyers and sellers.An example of mechanism design theory would be of an auction in which sellers (who want a higher price for the auctioned item) and buyers (who want a lower one) compete to set the value of the transaction, and in which neither buyers or sellers possess all available information because some is held by only one party. Mechanism design theory seeks to identify where the various gaps in information will occur so that parties can avoid them. |
 |
Investopedia explains 'Mechanism Design Theory'Unlike traditional game theory, in which variables concerning the goods and services produced, level of competition and extent of shared information are strictly controlled, mechanism design allows analysts more flexibility. Information about competitors in markets can be very limited, known as "information asymmetry."Since mechanism design theory allows economists to relax restrictions on some variables, such as the importance of information control, it allows researchers to determine how different parties can benefit when a particular strategy is used in varying situations. |
Related Definitions
Articles Of Interest
-
An Introduction To Behavioral Finance
Curious about how emotions and biases affect the market? Find some useful insight here. -
Understanding Investor Behavior
Discover how some strange human tendencies can play out in the market, posing the question: are we really rational? -
What Is Market Efficiency?
The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible? -
Game Theory: Beyond The Basics
Take your game theory knowledge to the next level by learning about simultaneous games and the Nash Equilibrium. -
Nobel Winners Are Economic Prizes
Before you try to profit from their theories, you should learn about the creators themselves. -
The Basics Of Game Theory
Break down and examine the potential consequences of economic/financial scenarios. -
Leading Economic Indicators Predict Market Trends
Leading indicators help investors to predict and react to where the market is headed. -
Women And Investing: It's A Style Thing
You don't have to be a boy or act like a boy to win. In fact, doing the opposite could be better for your financial health. -
Great Company Or Growing Industry?
Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth. -
Build A Model Portfolio With Style Investing
This sophisticated approach will add flair to your returns.
Free Annual Reports
