Mechanism Design Theory

Posted in Finance, Accounting and Economics Terms, Total Reads: 242

Definition: Mechanism Design Theory

Mechanism design theory is a concept in economics which determines various situations in the markets where businesses, governments, financial institutions etc can either flourish or can fail. It basically highlights the need of seller to get a maximum price and need of a buyer to purchase cheaper, would lead to different set of strategies, as the same strategy would get a different result.

In general, mechanism design (also called reverse game theory) is a field in game theory which studies solution on the concepts for a class of private information games. 

The two distinguishing features of these games are:

• A game designer chooses the game structure rather than inheriting one

• The designer is interested in the game's result

In similar terms, mechanism design theory exists for finance and economy. It is an economic theory which says how to determine the situations in which a particular strategy or a mechanism would work efficiently, in comparison to situations in which the same strategy would not have worked as much efficiently. 


Buyers want a cheaper price for the same product which the seller wants to sell at a costlier price. This theory would enable them to get to a conclusive price, which would benefit both the buyer and the seller.


• Mechanism design theory allows economists to relax restrictions on some variables

• allows researchers to determine how different parties can benefit when a particular strategy is used in varying situations.


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