Explain the scope of mechanism design relating it to implementation theory and game theory

Mechanism design is a field of economics that focuses on designing rules and mechanisms to achieve specific outcomes in situations with strategic interactions among rational individuals.

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It lies at the intersection of implementation theory and game theory:

  1. **Implementation Theory**: Implementation theory deals with the problem of finding mechanisms or rules that induce individuals to reveal their private information honestly, leading to a desired social outcome. Mechanism design is a practical application of this theory, aiming to design mechanisms that implement specific objectives even when participants have private information.
  • **Game Theory**: Game theory provides the analytical tools for modeling strategic interactions among rational agents. Mechanism design uses game theory to understand how participants will behave strategically and how to design mechanisms that lead to desirable outcomes in these strategic settings.

In essence, mechanism design draws upon the theoretical foundations of implementation theory and game theory to solve real-world problems where information is incomplete or asymmetric, and self-interested individuals may not naturally act in a way that maximizes the overall welfare.

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