Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Tutoring
  • Home
  • Economics, Finance, & Analytics
  • Economic Analysis & Monetary Policy

Mechanism Design Theory - Explained

What is Mechanism Design Theory?

Written by Jason Gordon

Updated at April 24th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is Mechanism Design Theory?How is the Mechanism Design Theory Used?Mechanism Design Theory vs. Financial MarketsAcademy Research on Mechanism Design Theory

What is Mechanism Design Theory?

Mechanism design theory refers to an approach in economics that tries to study how particular results or outcomes are achieved. Economists use this theory to compare, analyze, and regulate some instruments associated with a specific outcomes achievement.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

How is the Mechanism Design Theory Used?

Mechanism design theory was popularized by Erick Maskin, Roger Myerson, and Leonid Hurwicz. In 2007, the three were awarded a Nobel Memorial Prize in Economic Sciences to recognize their mechanism design theory work. They were branded as the subjects founders. Their research has, to some extent, offered solutions to the knowledge gap that exists between sellers and buyers as well as the markets efficient operation consequences. According to the Nobel Committee, the theory helped to distinguish situations working in the market and those that dont. By using the approach, economists were able to identify regulation schemes, efficient trading mechanisms, and voting procedures. Despite the theory being highly abstract, its application in real-world situations is concrete. It has been able to justify the interventions of government as far as operational markets such as health care are concerned. It helps in constructing rules that prevent disparity in information between groups of sellers and buyers. The gap in knowledge is known as information asymmetry in economics, and it is currently the most studied discipline.

Mechanism Design Theory vs. Financial Markets

There has been the development of several mathematical theorems because of the many applications for mechanism design theory. The assumptions and applications make it easy for researchers to manage information and restrictions control of the involved entities so that they can come up with the desired results. An excellent example of a place where the mechanism design theory can be applied is in auction markets. The regulators primary aim in those markets is to produce an orderly and efficient market for participants. For them to achieve this, they involve several entities with different associations and information levels. They use mechanism design theory to control and regulate information that is available to participants so that they can achieve their desire to have an orderly market. To properly accomplish this, it requires monitoring of activity and information at different levels for market makers, exchanges, sellers, and buyers.

Related Topics

  • Equilibrium (Economics)
  • Rational of Choice Theory
  • Recursive Equilibrium
  • Game Theory
  • Paradox of Rationality
  • Rational Expectations Theory
  • Shapley Value
  • Mechanism Design Theory



mechanism design theory

Was this article helpful?

Yes
No

Related Articles

  • Job Openings and Labor Turnover Survey - Explained
  • Reserve Currency - Explained
  • Fed Balance Sheet - Explained
  • New Growth Theory - Explained



©2011-2023. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand