Abstract

We give an introduction to the micro-economic field of Mechanism Design slightly biased toward a computer-scientist's point of view.

Introduction

Mechanism Design is a subfield of economic theory that is rather unique within economics in having an engineering perspective. It is interested in designing economic mechanisms, just like computer scientists are interested in designing algorithms, protocols, or systems. It is best to view the goals of the designed mechanisms in the very abstract terms of social choice. A social choice is simply an aggregation of the preferences of the different participants toward a single joint decision. Mechanism Design attempts implementing desired social choices in a strategic setting – assuming that the different members of society each act rationally in a game theoretic sense. Such strategic design is necessary since usually the preferences of the participants are private.

This high-level abstraction of aggregation of preferences may be seen as a common generalization of a multitude of scenarios in economics as well as in other social settings such as political science. Here are some basic classic examples:

• Elections: In political elections each voter has his own preferences between the different candidates, and the outcome of the elections is a single social choice.

• Markets: Classical economic theory usually assumes the existence and functioning of a “perfect market.” In reality, of course, we have only interactions between people, governed by some protocols. Each participant in such an interaction has his own preferences, but the outcome is a single social choice: the reallocation of goods and money.

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