MECHANISM DESIGN THEORY

An economic theory that attempts to identify the situations in which a certain strategy or mechanism will work effectively, as compared to situations where the same strategy will not work efficiently. It lets economists analyze and compare the way the markets or institutions like government effectively allocate products and services, given the gap in data between consumers and producers.

One example of mechanism design theory is an auction by which sellers (who desires a higher bid price for the auctioned item) and buyers (who want a lower price) are competing to set the value of that auctioned item; neither one of them has all available information because one party holds the information. It seeks to determine where several information gaps appear so both parties can avoid these gaps.

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