Mechanism design is a field that applies economics and game theory to the design of incentive structures—or mechanisms—in order to achieve specific social objectives. Conventionally, mechanism design assumes that players have private information about their preferences and act rationally so as to maximize those preferences.
There are several types of mechanisms:
- Markets facilitate the provision and exchange of goods between buyers and sellers.
- Auctions are a type of market in which buyers place bids and the prices and allocation of items are determined by the bids.
- Matching markets are markets in which members of two sets of players are matched, or goods are allocated to players without prices.
- Voting systems are mechanisms that aggregate the preferences of individual players into a collective decision.
Mechanisms can be evaluated based on the following criteria:
- Pareto efficiency: no player can be made better off without making another player worse off.
- Truthfulness or strategyproofness: it is a dominant strategy for players to submit their true preferences.
- Stability: a matching is stable if no players can be made better off by changing their assignment without making any other players worse off.
- Social welfare: mechanisms may be evaluated based on whether they maximize a given social welfare function.
Mechanism design has been used to improve social outcomes in domains such as medical residency matching, school choice, organ donation, and voting. Mechanisms have also been proposed to improve the provision of public goods.