Mechanism design is the application of game theory and computer science to the design of incentives. One of the interesting results of the field is that a mechanism that shares its costs with at least some of its agents can’t be at the same time efficient, incentive-compatible and budget-balanced. In this article, we will unpack what does this mean.
In mechanism design, a designer set the rules of a system with a number N of agents to reach a certain aim.
Each agent i has private information θᵢ called the type of the agent. The set of all the possible types of the agent i is Θᵢ, which is called the type set or type profile of agent i. The set of the type profiles of all the agents is Θ. …