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.

INVESTOPEDIA EXPLAINS '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. Roger B. Myerson

    An American economist and winner of the 2007 Nobel Prize in Economics, ...
  4. John F. Nash Jr.

    An American mathematician who won the 1994 Nobel Memorial Prize ...
  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. What Is Market Efficiency?
    Active Trading

    What Is Market Efficiency?

  2. Nobel Winners Are Economic Prizes
    Options & Futures

    Nobel Winners Are Economic Prizes

  3. Fine Art Can Be A Fine Investment
    Investing Basics

    Fine Art Can Be A Fine Investment

  4. The History Of The T-Bill Auction
    Bonds & Fixed Income

    The History Of The T-Bill Auction

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center