The rules of the game: using mechanism design to deliver a better, fairer Britain

The new Labour Government has made mission-driven government, market shaping, and crowding in private investment central themes of its economic agenda. But shaping markets means more than setting broad directions and writing top-level industrial strategies. It requires rewriting the very rules of the game so that private and third-sector actors become allies in advancing public goals, not opponents to be fought. And this is precisely where an underused field of economic thinking, mechanism design, has much to offer.

Mechanism design, sometimes described as reverse game theory, is the study of how to create systems in which multiple actors, each with their own information and goals, can be pushed to produce collectively desirable outcomes. Unlike traditional economic analysis, which predicts the outcome of a given system, mechanism design works backwards: it starts with the desired result and asks: 'What rules or structures would deliver that outcome?'

Pioneered by economists Leonid Hurwicz, Eric Maskin, and Roger Myerson, who won the 2007 Nobel Prize for it, mechanism design has already shown impact in areas like spectrum allocation, school places, and organ donation. It's a way to make markets work to achieve social good, not by replacing them but by redesigning them to channel activity more effectively. It is, in short, an essential tool for any government that wants to shape markets instead of simply correcting their failures.

British economists have played a central role in applying these ideas: Ken Binmore helped pioneer the UK's 3G spectrum auctions under the last Labour Government, and Paul Klemperer developed the 'Anglo-Dutch' auction format now used around the world.

As the Government works to rebuild Britain's economic institutions – housing, energy, transport, care – mechanism design offers a rigorous framework for doing so. It also aligns closely with the Government's desire to crowd in private action, by creating the right environment and incentives for businesses, communities, and individuals to deliver outcomes that support national missions.

This report will demonstrate how mechanism design can be used by the Government to correct power imbalances: to foster genuine equity, ensure fair distribution of resources, and empower communities, not just correct market failures. It's not a silver bullet, nor does it abdicate public responsibility; rather, it offers a pragmatic way to channel individual and collective action towards shared social goals like fairness and opportunity.

Perhaps most importantly, mechanism design can help unlock political blockages where previous efforts have failed. As we show below, it can do so by generating new policy options that will not be stymied by vested interests.

What follows is a survey of where mechanism design has worked, and where it could be put to work next. We explore how careful institutional design has already shaped incentives in education, planning, digital platforms, and health, and how these same principles might inform UK policy from housing to clinical research.

A government serious about shaping markets needs to shape the mechanisms through which those markets operate. As this article shows, many of society's most stubborn problems are best tackled not through optimistic exhortation or attempted micromanagement from the centre, but by designing the rules under which different players act – rules that make doing the right thing the easy thing, the desired thing, or the default thing.