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."



RELATED TERMS
  1. Eric S. Maskin

    An American professor of social science at the Institute for ...
  2. Roger B. Myerson

    An American economist and winner of the 2007 Nobel Prize in Economics, ...
  3. Leonid Hurwicz

    A professor of economics at the University of Minnesota and winner ...
  4. Mechanism Design Theory

    An economic theory that seeks to determine the situations in ...
  5. Self-Interest

    Acting in the way that is most personally beneficial. Adam Smith, ...
  6. Adam Smith

    An 18th-century philosopher and free-market economist famous ...
Related Articles
  1. Economics

    Understanding Self-Interest

    Acting in one’s self-interest means to act in the way that is the most personally beneficial.
  2. Personal Finance

    Pros and Cons of Capitalist vs Socialist Economies

    Capitalism relies on the markets. Socialism, on government planning. Each system has its pros and cons.
  3. Professionals

    Microeconomics

    CFA Level 1: Section 3 Microeconomics
  4. Economics

    Economics Basics: Introduction

    Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor ...
  5. Savings

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  6. Personal Finance

    Microeconomics: A Brief History

    by Marc DavisAs early as the 18th century, economists were studying the decision-making processes of consumers, a principal concern of microeconomics. Swiss mathematician Nicholas Bernoulli (1695-1726) ...
  7. Fundamental Analysis

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  8. Investing Basics

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  9. Economics

    Economics 101

    Economics is the study of how individuals, governments, businesses and other organizations make choices that effect the allocation and distribution of scarce resources.
  10. Budgeting

    Find A Trustworthy Mechanic

    Don't take your car's reliability for granted. It's more likely to be there for you when you need it if you follow these inexpensive precautions.
RELATED FAQS
  1. How do stockholders use agency theory to affect management?

    Explore the intricacies of agency theory that places stockholders and management in a unique relationship where both parties ... Read Answer >>
  2. Does agency theory apply to brokers and clients?

    Learn how the existence of incentives that encourage moral hazard impacts broker-client relationships. Understand how agency ... Read Answer >>
  3. How do modern corporations deal with agency problems?

    Learn about ways that capitalist investment markets regulate the principal-agent problems that arise with corporate management ... Read Answer >>
  4. What is the homo economicus?

    Homo economicus or "economic man" is the characterization of man in some economic theories as a rational person who pursues ... Read Answer >>
  5. What's the difference between agency theory and stakeholder theory?

    Learn how agency theory and stakeholder theory are used in business to understand common business communication problems ... Read Answer >>
  6. What kinds of topics does microeconomics cover?

    Read about the purpose, derivations and uses of microeconomics, and see how the interaction of scarcity and choice drives ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center