An Introduction to the Theory of Mechanism Design

Mechanism design is a branch of economics and game theory that studies the design of mechanisms, which are rules that govern the interactions of agents in a social or economic system. The goal of mechanism design is to design mechanisms that achieve desired outcomes, such as efficiency, fairness, or incentive compatibility.

Mechanism design has a wide range of applications, including the design of auctions, voting systems, and social welfare programs. In recent years, mechanism design has also been applied to the design of online marketplaces, social networks, and other complex systems.

An Introduction to the Theory of Mechanism Design

by Tilman Borgers

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The Basic Elements of a Mechanism

A mechanism consists of the following elements:

• A set of agents: The agents are the individuals or organizations that participate in the mechanism.
• A set of actions: The actions are the choices that agents can make in the mechanism.
• A set of outcomes: The outcomes are the consequences of the agents' actions.
• A set of rules: The rules specify how the agents' actions are translated into outcomes.

The Goals of Mechanism Design

The goal of mechanism design is to design mechanisms that achieve desired outcomes. The most common goals of mechanism design include:

• Efficiency: Efficiency means that the mechanism allocates resources in a way that maximizes the total welfare of the agents.
• Fairness: Fairness means that the mechanism distributes resources in a way that is considered to be fair by the agents.
• Incentive compatibility: Incentive compatibility means that the mechanism gives agents the right incentives to report their true preferences and take actions that are in their best interests.

The Challenges of Mechanism Design

Mechanism design is a challenging task because it is often difficult to design mechanisms that achieve all of the desired goals. For example, it is often difficult to design mechanisms that are both efficient and fair. Additionally, it is often difficult to design mechanisms that are incentive compatible, especially in settings where agents have private information.

Applications of Mechanism Design

Mechanism design has a wide range of applications, including the design of:

• Auctions: Auctions are mechanisms that allow buyers and sellers to trade goods and services. Mechanism design can be used to design auctions that are efficient, fair, and incentive compatible.
• Voting systems: Voting systems are mechanisms that allow voters to choose representatives or make decisions. Mechanism design can be used to design voting systems that are fair, efficient, and incentive compatible.
• Social welfare programs: Social welfare programs are mechanisms that provide benefits to individuals or families. Mechanism design can be used to design social welfare programs that are efficient, fair, and incentive compatible.
• Online marketplaces: Online marketplaces are platforms that allow buyers and sellers to trade goods and services. Mechanism design can be used to design online marketplaces that are efficient, fair, and incentive compatible.
• Social networks: Social networks are platforms that allow users to connect with each other and share information. Mechanism design can be used to design social networks that are efficient, fair, and incentive compatible.

Mechanism design is a powerful tool that can be used to design social and economic systems that achieve desired outcomes. However, mechanism design is a challenging task, and it is often difficult to design mechanisms that are efficient, fair, and incentive compatible. Despite these challenges, mechanism design has a wide range of applications, and it is a valuable tool for policymakers and other decision makers.

References

1. Gibbard, A. (1973). Manipulation of voting schemes: A general result. Econometrica, 41(4),587-601.
2. Hurwicz, L. (1960). Optimality and information efficiency in resource allocation processes. In K. Arrow, S. Karlin, & P. Suppes (Eds.),Mathematical models in the social sciences, 1960, 27-46. Stanford University Press.
3. Maskin, E. (1995). Nash equilibrium and the number of players. Journal of Economic Theory, 67(1),28-49.
4. Myerson, R. (1981). Optimal auction design. Mathematics of Operations Research, 6(1),58-73.
5. Roth, A. (1990). The evolution of the labor market for medical interns and residents: A case study in game theory. Journal of Political Economy, 98(6),991-1016.

An Introduction to the Theory of Mechanism Design

by Tilman Borgers

4.7 out of 5

Language	:	English
File size	:	14470 KB
Text-to-Speech	:	Enabled
Screen Reader	:	Supported
Enhanced typesetting	:	Enabled
Word Wise	:	Enabled
Print length	:	263 pages
Lending	:	Enabled

FREE