Market Design

15 October 2012 at 10:04 am 6 comments

| Peter Klein |

A few quick thoughts on today’s Nobel Prize announcement. More later, once better informed people, from whom we can steal ideas, have weighed in.

  • Market design is basically the study of exchange without prices. As most of economics deals with prices, this is a somewhat specialized subfield.  The best-known example, courtesy of Al Roth, deals with kidney exchanges. Most economists will tell you that the best way to deal with shortages of transplantable organs like kidneys is to legalize kidney sales. (My friend Andy Barnett and the late David Kaserman wrote extensively on this.) If, for whatever reason, that is infeasible — Roth notes that many people find such sales “repugnant” — then various matching algorithms may be better than nothing. Roth and colleagues have studied and compared these matching algorithms.
  • To get up to speed, Roth’s 2007 article in Harvard Business Review is probably a good place to start. For more technical comments see Josh Gans and Alex Tabarrok, and. Knowledge Problem is my go-to source for this kind of stuff, so I’m eagerly awaiting the commentary there.
  • We discussed market design at O&M in 2007.
  • Shapley’s contribution’s to cooperative game theory underlie Roth’s work. It’s a bit trite to point this out, but I’ll point out anyway that the huge popularity of game theory over the last three decades, particularly in IO and business strategy, rely almost entirely on noncooperative game theory, while the cooperative branch has been somewhat neglected. But bargaining is clearly important for strategy, organization, and entrepreneurship, so look for increased interest in this branch.
  • Someone pointed out that Roth appears to be the first economics blogger to win the Nobel. (I’m not counting Krugman, who’s not what I’d call an academic blogger.)
  • Enthusiasm among my informal circle of professional friends is muted. One suggests that, rather than take cultural resistance to the price mechanism (e.g., for kidney allocation) as exogenous, scholars should work to overcome this resistance. Another calls this “one of the most boring prizes yet. At best it is a prize for some no doubt useful ideas in some small contexts of effecting coordination, but the real coordinating marvel is the market.” A third calls Shapley’s UCLA lectures on cooperative game theory “the most useless classes that I took in college. . .  we would go through one division rule after another to see which axioms they satisfied. When I asked him how you picked between different division rules that satisfied the same axioms, Lloyd said that it all depended on what conclusion that you wanted to reach.”

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6 Comments Add your own

  • 1. DRDR  |  15 October 2012 at 12:30 pm

    “One suggests that, rather than take cultural resistance to the price mechanism (e.g., for kidney allocation) as exogenous, scholars should work to overcome this resistance.”

    Ok, but what about the people who need kidneys now, before scholars can successful overcome this resistance? Screw them while we pursue our ideal? Al’s work saves lives now, and it’s not like it’s preventing anyone else from pursuing that ideal.

  • 2. Roth/Shapley Nobel « Knowledge Problem  |  15 October 2012 at 5:51 pm

    [...] to add to today’s congratulations to Al Roth and Lloyd Shapley for this year’s Nobel; Peter Klein has a useful roundup of links to good commentary, with a namecheck (but not a link ;->) to us. Mike’s frequent [...]

  • 3. Mike Giberson  |  15 October 2012 at 6:16 pm

    Exactly, the old saw about not letting “the perfect be the enemy of the good” seems apt on this issue. Also, my sense is that non-price kidney exchanges tend to reduce the repugnance that blocks kidney markets.

  • 4. Paul Walker  |  15 October 2012 at 9:42 pm

    “the study of exchange without prices”

    I don’t get this bit. One example Roth gives of market design is the auctioning of radio spectrum by many governments and there were prices there, very large prices!

  • 5. vpostrel  |  18 November 2012 at 12:13 am

    Aside from the issue of letting the perfect be the enemy of the good, there is also the question of HOW you make the case for allowing payments to organ donors. Before people can accept the idea of paying living kidney donors, they first have to accept the idea of living donation in the first place. It must be normalized and not considered either crazy or extraordinarily heroic. By fostering real-world kidney chains, Al Roth’s work has done much more to make that happen than the previous, largely theoretical musings about the virtues of markets and incentives. Plus people have actually gotten off dialysis. Here’s my take: http://www.bloomberg.com/news/2012-10-16/an-economics-nobel-for-saving-lives.html

  • 6. Peter Klein  |  18 November 2012 at 12:41 am

    Virginia, this is all well and good, but doesn’t address whether the work is worthy of a Nobel Prize in economics, which is given for technical achievement in economic theory or application, not philanthropy. With several week’s reflection, the consensus among economists in my circles seems to be that this is interesting stuff, but well below the significance and long-term impact that usually justifies a Nobel Prize.

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