Mechanism design is a field of economics with a wide range of applications including Blockchain, Internet auctions, and public policy. It is closely linked to game theory and is also called reverse game theory. The mechanism design theory being highly abstract and mathematical remains intricate. Here is an example to help you develop intuition about what is mechanism design.
Suppose you are a father of two intelligent daughters. Every Friday when you come back home from work, you bring a small cake for your daughters. Both the girls love cake and neither of them have any intention to share it with her other sister. The girls being smart and having no intention to share it, nod in front of you but frequently ends up fighting with each other for the bigger pie.
Two smart sisters. They love cakes and often gets into a fight with each other over it.
As a father, you want to stop this. You observe that the daughter with the knife tends to take away the bigger pie. A possible solution could be that you take the knife yourself and cut the cake into two equal halves, and then give it to the girls.
But being a nice father you don’t want to be an authoritative figure and interfere in girls affair. Rather you want to use your “soft” power to solve the quarrel.
Next time when you bring the cake on Friday evening, you leave a small note for your daughters along with it. The note sets a ground rule for cake cutting, it says:
One of you can take the knife and cut the cake. And the other person gets to choose the piece first.
Girls are smart but also being nice daughters, they are bound to follow this small note by their loving father, who brings them the cake every Friday.
Cake to be divided between daughters!
Now no matter whosoever takes the knife and cut the cake, the cake will be divided equally. Let’s say the older sister cuts the cake in unequal halves, then the younger sister will have the chance to take the piece first and she will definitely choose the bigger one. This way the older sister will be at a loss if she cuts the cake into unequal halves.
Being a smart girl, she quickly realizes that the only way she can have the biggest possible pie of cake is to cut it into two equal halves.
The same goes for the case when younger sister cuts the cake.
You, a nice and proud father is able to divide the cake equally by laying down some smart ground rules and without using any “force”. This is what Mechanism Design is.
Mechanism design is the art of designing rules of a game which comprises of smart players and is decentralized in nature, to achieve the desired objective.
Above example just touches the tip of the iceberg, there are a whole lot of concepts in Mechanism Design. For more information look at the reference.
Reference and further reading:
Garg, D. and Narahari, Y., 2006. Foundations of mechanism design. Technical report.
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