Mechanism Design


DEFINITION of 'Mechanism Design'

A branch of microeconomics that explores how businesses and institutions can achieve desirable social or economic outcomes given the constraints of individuals' self-interest and incomplete information.

When individuals act in their own self-interest, they may not be motivated to provide accurate information. Mechanism design takes private information and incentives into account to enhance economists' comprehension of market mechanisms and shows how the right incentives (money) can induce participants to reveal their private information and create an optimal outcome.

BREAKING DOWN 'Mechanism Design'

Leonid Hurwicz, Eric Maskin and Roger Myerson won the 2007 Nobel Prize in Economics for laying the foundations of mechanism design theory. One application of the theory, as shown by Myerson, is auction design. Mechanism design is also known as "reverse game theory" or "incentive-compatible mechanisms."

  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  2. Leonid Hurwicz

    A professor of economics at the University of Minnesota and winner ...
  3. John F. Nash Jr.

    An American mathematician who won the 1994 Nobel Memorial Prize ...
  4. Roger B. Myerson

    An American economist and winner of the 2007 Nobel Prize in Economics, ...
  5. Eric S. Maskin

    An American professor of social science at the Institute for ...
  6. Prisoner's Dilemma

    A paradox in decision analysis in which two individuals acting ...
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