Business Today

All about mechanism design theory

What is mechanism design?  What are its salient points?  How does it work?...

By Rishi Joshi        Print Edition: Nov 18, 2007

 Leonid Hurwicz
 Eric S. Maskin
 Roger Myerson

What is it?
Adam Smith pointed out how ideal market conditions lead to efficient allocation of scarce resources. But real life markets are rarely ideal. Mechanism Design Theory, which won economists Leonid Hurwicz, Eric S. Maskin and Roger Myerson this year’s Nobel Prize for Economics, tells you when markets are working well and when they’re not.

 What are its salient points?
Society is governed by mechanisms that make collective decisions while attempting to take account of individual preferences. These mechanisms try to deliver the greatest social good. Studying such mechanisms is the goal of the theory, and it can be stated as the art of producing institutions that align individual incentives with overall social goals.

 How does it work?
Mechanism Design Theory is an extension of game theory and deals with the consequence of applying different types of rules to a given problem. It’s a tool for demonstrating which mechanism, out of all possible allocation mechanisms, gives the optimal result. The theory can be applied to diverse problems such as the auctioning of radio frequencies to mobile phone companies to the building of social welfare systems.

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