Editing Mechanism design (section)

{{Short description|Field of economics and game theory}}
{{inline|date=July 2024}}
{{Economics sidebar}}[[File:Stanley Reiter MDdiagram.png|thumb|345px| The upper-left space <math>\Theta</math> depicts the type space and the upper-right space ''X'' the space of outcomes. The [[social choice]] function <math>f(\theta)</math> maps a type profile to an outcome. In games of mechanism design, agents send messages <math>M</math> in a game environment <math>g</math>. The equilibrium in the game <math>\xi(M,g,\theta)</math> can be '''designed''' to implement some social choice function <math>f(\theta)</math>.|right]]

'''Mechanism design''' (sometimes '''implementation theory''' or '''institution''' '''design''')<ref>{{Cite web |title=Journal of Mechanism and Institution Design |url=http://www.mechanism-design.org/society.php |access-date=2024-07-01 |website=www.mechanism-design.org}}</ref> is a branch of [[economics]] and [[game theory]]. It studies how to construct rules—called [[Game form|mechanisms]] or institutions—that produce good outcomes according to [[Social welfare function|some predefined metric]], even when the designer does not know the players' true preferences or what information they have. Mechanism design thus focuses on the study of [[solution concept]]s for a class of private-information games. 

Mechanism design has broad applications, including traditional domains of economics such as [[market design]], but also [[political science]] (through [[voting theory]]). It is a foundational component in the operation of the [[internet]], being used in networked systems (such as [[inter-domain routing]]),<ref name=":02" /> [[e-commerce]], and [[Sponsored search auction|advertisement auctions]] by [[Facebook]] and [[Google]].

Because it starts with the end of the game (a particular result), then works backwards to find a game that implements it, it is sometimes described as '''reverse game theory'''.<ref name=":02">{{Cite journal |last=Penna |first=Paolo |last2=Ventre |first2=Carmine |date=July 2014 |title=Optimal collusion-resistant mechanisms with verification |url=https://doi.org/10.1016/j.geb.2012.09.002 |journal=Games and Economic Behavior |volume=86 |pages=491–509 |doi=10.1016/j.geb.2012.09.002 |issn=0899-8256}}</ref> [[Leonid Hurwicz]] explains that "in a design problem, the goal function is the main given, while the mechanism is the unknown. Therefore, the design problem is the inverse of traditional economic theory, which is typically devoted to the analysis of the performance of a given mechanism."<ref>L. Hurwicz & S. Reiter (2006), [[Designing Economic Mechanisms]], p. 30</ref>

The 2007 [[Nobel Memorial Prize in Economic Sciences]] was awarded to [[Leonid Hurwicz]], [[Eric Maskin]], and [[Roger Myerson]] "for having laid the foundations of mechanism design theory."<ref>{{cite press release |url=http://nobelprize.org/nobel_prizes/economics/laureates/2007/press.html |title=The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007 |date=October 15, 2007 |access-date=2008-08-15 |publisher=[[Nobel Foundation]]}}</ref> The related works of [[William Vickrey]] that established the field earned him the 1996 Nobel prize.