Mechanism Design

AAA

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."



RELATED TERMS
  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 ...
Related Articles
  1. Active Trading

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  2. Options & Futures

    Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  3. Investing Basics

    Fine Art Can Be A Fine Investment

    The art market is fickle, and there are no guarantees of profitability, but with a little legwork and forethought you can fill your home with images that may prove worthy investments down the ...
  4. Bonds & Fixed Income

    The History Of The T-Bill Auction

    Learn how the U.S. found the perfect solution to its debt problems and ended up creating one of the largest markets in the world.
  5. Options & Futures

    Shopping Online: Convenience, Bargains And A Few Scams

    Shopping from the comfort of your couch has major benefits - and some unpleasant side effects.
  6. Options & Futures

    Game Theory: Beyond The Basics

    Take your game theory knowledge to the next level by learning about simultaneous games and the Nash Equilibrium.
  7. Fundamental Analysis

    The Basics Of Game Theory

    Break down and examine the potential consequences of economic/financial scenarios.
  8. Economics

    Understanding Organic Growth

    Organic growth is the increase in a company’s revenue and value due to internal operations.
  9. Economics

    Explaining Market Penetration

    Market penetration is the measure of how much a good or service is being used within a total potential market.
  10. Economics

    Calculating the Marginal Rate of Substitution

    The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
RELATED FAQS
  1. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  2. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  3. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  4. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
  5. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>
  6. How can tariffs cause inefficiencies in domestic industries?

    Any government regulation naturally creates inefficiencies in a pure supply and demand marketplace. When it comes to the ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  2. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  3. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  4. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  6. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!