Can someone explain the difference between contract theory and mechanism design?
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$\begingroup$ Contract theory vs. Mechanism design. Mechanism design theory has been mathematically elegant but has been unable to address the “big” questions, such as “socialism vs. capitalism”. Instead it proved useful for more manageable smaller questions, specifically business practices - contracts among agents. A detail compare form here,too much content I can’t upload successful, you could learn more from:docsbay.net/lectures-in-contract-theory $\endgroup$– Lynn1686Apr 5, 2019 at 3:02
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2 Answers
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Contracts are a subset of all mechanisms where agreements are enforcable.
An example of a mechanism that is not a contract:
A second price auction (or Vickrey auction) is a truth-telling mechanism where the enforcability of contracts is not required. In the truth-telling equilibrium no one has any incentive to change their bid, no matter the outcome. This is not because changing the bid would be a violation of contract and result in penalties.
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As the previous answer mentions Contract Theory is a subset of Mechanism Design. Contract Theory is the study of Mechanism Design restricted to a single agent, i.e how to incentivize a single agent to achieve a desirable outcome, when you allow for multiple agents, the same problem becomes a mechanism design problem.
