Mechanism design theorists at least take their challenge seriously, and thus try to design institutions that work under the same constraints as the market—i.e. institutions that respect information and self-interest constraints. The results have been mixed. Typically the mechanisms that work in theory are very complicated—far more complicated than the market or other mechanisms that we see used in practice. I see little hope that mechanism design will rescue the dreams of Lange, et al.
More realistically, I see mechanism design as a tool to make markets more powerful. In some situations, for example, mechanism design shows that public goods can be voluntarily provided. In other situations, mechanism design can make government more effective, but it will do so by making government more “market-like.” Contracting-out of government services like garbage pickup, prisons, and roads, for example, can be carried out even farther if contracts are more carefully designed. The theory of mechanism design provides the template for thinking about the best possible types of contracts.
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