What is Mechanism Design in Game Theory?

A game theory lesson, with help from the Seinfeld gang

Mechanism design is a process of using game theory logic to design rules to get to a desired outcome. Much of game theory that is taught involves a problem that is given to somebody to solve. But that’s not the real world, and mechanism design recognizes this. You have a desired outcome in mind, and you have to set up the “rules of the game” to attempt to get to the outcome. It is applicable for lawmakers, managers, parents, coaches … basically everybody.

In this episode of Seinfeld, Jerry, Kramer, George, and Elaine get thrown in jail. What was their offense? They did not help a citizen who was getting mugged. This clip gives us a good opportunity to talk about the economics and game theory topic of mechanism design.

Here, the community wanted people to aid citizens in need, and passed a law making it illegal to not help. Is this a good mechanism, almost certainly not. Watch the video to learn more about the process of using mechanism design effectively.