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Mechanism design theory provides methods to answer the following general question: What are the best rules of the game, or the best mechanism, for attaining a given objective? These objectives may vary in character: for example social welfare, profit from transactions in a market, a fair allocation of resources or a sound environment. This admission of many possible goals is what makes mechanism design theory so important and so generally applicable.
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According to the so-called revelation principle, it is enough to study only a subset (the green triangle) of all mechanisms, the incentive-compatible direct mechanisms. These require each of the participants to disclose their private information and are structured so that it is optimal for each participant to report truthfully: to put their cards on the table. The subset of direct mechanisms is well-structured enough to enable mathematical analysis. This principle hence makes it possible to make general calculations for complicated decision-making processes where previously we have virtually had to resort to “trial and error”.
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