This is the whole course in one sitting. Every idea you’ve met shows up here as a question: the great flip from analysing a fixed game to designing the rules; incentive compatibility, where honesty is a best response, and its strongest form, strategyproofness; the second-price auction, where bidding your true value is a dominant strategy; the revelation principle, which lets you study only truthful mechanisms; the toolbox in the wild — Pigouvian taxes, cap-and-trade, and the matching markets that place kidneys and school seats without a price; and the impossibility results that prove where even the best rules must give something up. Hold the through-line in your head: mechanism design never asks people to be better than they are — it asks the rules to be smarter, so that self-interest walks itself to the outcome you wanted. Take a breath. There is no going back once you commit.
How this exam works
This is a real exam, not a practice quiz. Questions appear one at a time. Once you submit an answer it is locked for good — there is no going back, no retry, and no restart. Your score stays hidden until the very end. A few questions ask you to select all that apply (read those carefully — partial credit is not a thing here). You need 70% to pass. Ready when you are.
What is the "great flip" that defines mechanism design?
Select an answer to continue.
Big picture
Mechanism design, in one picture
- Mechanism design
- The great flip
- Forward game theory predicts the equilibrium of fixed rules; mechanism design fixes the outcome you want and engineers rules whose equilibrium produces it - you control only the rules, never preferences or play (Hurwicz, Maskin, Myerson, Nobel 2007)
- Incentive compatibility
- A mechanism is incentive-compatible when honesty is a best response, and strategyproof when honesty is a dominant strategy - cut-and-choose forces a selfish cutter to split 50/50, so self-interest produces fairness
- The second-price auction
- Highest bidder wins but pays the runner-up bid, so bidding your true value is a dominant strategy - the price depends only on rivals, not on you; eBay proxy bidding is this in disguise; first-price makes you shade and lie
- The revelation principle
- Any outcome any mechanism reaches can be reached by a truthful direct mechanism, so designers search only truthful rules - an analytical engine for proving what is possible and impossible, not a design prescription
- Mechanisms everywhere
- Pigouvian taxes internalise externalities, cap-and-trade reveals abatement costs through a permit market, and matching markets (deferred acceptance, kidney exchange, school choice) place people into scarce slots with no money at all
- Where it bites back
- Impossibility results (Myerson-Satterthwaite, Gibbard-Satterthwaite, Arrow) say you cannot have every good property at once; Goodhart gaming, unravelling, participation limits, and the equilibrium assumption all bound the craft, so simplicity is a virtue
- The great flip
Key takeaways
You now hold the whole model. Mechanism design is game theory in reverse: instead of predicting the equilibrium of fixed rules, you fix the outcome you want and engineer the rules so self-interested play produces it — you control only the rules, never people’s preferences or choices. The central prize is incentive compatibility (honesty is a best response) and its strongest form, strategyproofness (honesty is a dominant strategy); “I cut, you choose” is the clean example, where a selfish cutter is forced to split 50/50. The showpiece is the second-price (Vickrey) auction — highest bidder wins but pays the runner-up’s bid, so bidding your true value is a dominant strategy because the price never depends on your own bid (and eBay’s proxy bidding is exactly this). The revelation principle says any outcome reachable by any mechanism is reachable by a truthful one, so designers can study only honest rules — a tool for proving possibility and impossibility, not a prescription. The toolbox is everywhere: Pigouvian taxes and deposit-refunds internalise externalities, cap-and-trade reveals hidden abatement costs through a permit market, and matching markets (deferred acceptance, kidney exchange, school choice) place people without any price. And stay honest about the limits: impossibility results (Myerson–Satterthwaite, Gibbard–Satterthwaite, Arrow) prove you can’t have efficiency, honesty, and budget balance all at once; Goodhart’s law means mechanisms reward the letter not the spirit; participation constraints let players walk away; and every design assumes people actually reach the equilibrium — so simplicity is a real virtue. Never ask “how do I make these people behave?” Ask the designer’s question: what rule makes the behaviour I want each player’s own best response?