This chapter introduces mechanism design, which is the subject wherein games are designed so that rational play results in socially desirable outcomes. The judgment of Solomon from the Bible is used as an introductory example. The principles of mechanism design are then described. The use of the revelation principle is illustrated with an extended analysis of the Street Lamp Problem. The Clarke-Groves mechanism is briefly described. Finally, a critical review of implementation theory is offered that emphasizes its differences from mechanism design and its shortcomings.
Keywords: principal-agent problem, judgment of Solomon, moral hazard, adverse selection, revelation principle, Street Lamp Problem, Clarke-Groves mechanism, implementation theory, social decision rule, Maskin monotonicity
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