Mechanism Design Theory

Mechanism Design Theory Overview

Mechanism Design Theory helps explain why markets sometime work effeciently for the benefit of the greater economy and society and other times they break down. Mechanism Design Theory is a branch of game theory related to economics. Americans Leo Hurwicz, Eric Maskin and RogerMyerson were just awarded (10.15.07) the nobel prize in economics for their work in this area.

When the award was announced by the Nobel committee they stated, "The theory allows us to distinguish situations in which markets work well from those in which they do not. It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures."

What is Mechanism Design Theory?

Mechanism Design Theory is abstract and mathmetical in nature. It can be used by governments intervention into monopolies, healthcare, or security markets. In any capital market there is some gap however large or small between buyers and sellers often referred to as "information asymmetry" and what is referred to as "imperfect markets." This area of economics is widely studied and familiar to most who have taken a modern secondary school level economics course.

The point of employing the mechnaism design theory is to keep in check the natural digression of information between sellers and buyers to the point where the economy or society as a whole is adversely effected.

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