Mechanism design

Mechanism design studies how to create rules and institutions that produce desired outcomes when participants have private information or conflicting incentives.

Incentive compatibility: A property of a mechanism in which participants benefit from following its prescribed strategy rather than deviating. Mechanisms often aim to make truthful reporting each participant’s best strategy.
Auction theory: The study of auction formats, bidding behavior, and the allocation of goods through competitive offers. Auction design is a central application of private-information mechanism design.
Game theory: The mathematical study of strategic interaction among decision-makers. Mechanism design uses game-theoretic models to predict how participants respond to rules.
Market design: The practical design of rules and institutions that structure exchange and allocation in markets. Market design applies mechanism-design ideas to real institutions, while also drawing on empirical and operational tools.
Revelation principle: A theorem showing that, under specified conditions, outcomes achievable by any mechanism can be achieved by one where participants truthfully report private information. It lets designers analyze truthful-report mechanisms without considering every possible game form.
Combinatorial auction: An auction in which bidders can place offers on bundles of goods rather than only individual items. Bundle bidding illustrates how rules handle complementarities among participants’ valuations.
Information asymmetry: A condition in which parties to an interaction possess different information relevant to their decisions. Unequal information is the central constraint that mechanisms are built to address.
Social choice theory: The study of how individual preferences can be aggregated into collective decisions. It often studies preference aggregation without modeling strategic private information as the main design constraint.
Social choice function: A rule that maps participants’ preferences or types to a collective outcome. It formalizes the outcome a mechanism is meant to implement.
Matching market: A market that pairs participants on opposite sides, such as students and schools or doctors and hospitals. Matching rules must align choices and priorities when participants have different information and preferences.

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