Basic Economics and Probability Theory

Mechanism design

Mechanism design theory is a field of economics distinguished by a Nobel Memorial Prize in 2007. It combines probability and game theory in the design of multiplayer systems.

It can be thought of as solving the inverse problem of game theory.

• Game theory studies the outcomes of a given multiplayer game (which could be literal games or, more generally, any situation involving multiple players with conflicting objectives, such as a war or a deal negotiation).

• Mechanism design theory starts from the outcomes (for instance, maximizing the gains of players) and seeks to determine game mechanisms that would achieve them. The idea is to start from the end goal and work backward to design a mechanism (a game) that achieves it.

A key distinction is that game theory thinks in terms of strategy (what players should/shouldn't do), whereas mechanism design thinks in terms of incentives (why players should/shouldn't do things).