In its current form, mechanism design theory provides a general framework to study any collective decision problem. A mechanism design problem has three key inputs:
· A collective decision problem, such as the allocation of work in a team, the allocation of spectrum for mobile telephony or funding for public schools;
· A measure of quality to evaluate any candidate solution, for example efficiency, profits or social welfare;
· A description of the resources – informational or otherwise – held by the participants.
A mechanism specifies the set of messages that participants can use to transmit information and the decision that will be taken conditional on the messages that are sent.
Once a mechanism is in place, participants effectively “play a game” where they send messages (e.g., a bid in an auction) as a function of their information. The goal is to find a mechanism with an equilibrium decision outcome (sometimes required to be unique) that is best according to the given measure of quality. The strength of mechanism design lies in its generality: any procedure, market-based or not, can be evaluated within a unified framework.