Tuesday, October 29, 2019

Who Gets What And Why

Many different kinds of markets surround us: job markets, dating markets, stock markets, kidney exchanges, student acceptances/rejections, supermarkets etc. In Who Gets What ― and Why economist Al Roth discusses the factors that need to be set/controlled in order to make a market work.

The most obvious factor that needs to be present to make a market successful is that it has to be thick. That is, it needs suppliers and consumers to be present in sufficient number to encourage the arrival of potential counterparties. Too many participants can result in congestion, however, and so market designers may need to take steps to prevent markets from becoming unusable. (For example, an online dating market suffers from congestion when too many males send messages to a specific few females. The males don't get responses, the majority of females don't get messages, and a select few females are overwhelmed.)

Another factor that makes a market successful is that it needs to be safe. Will a participant be harmed by participating? For example, a hospital may have information that can cause a donor/receiver kidney pair match that can save someone's life, but if there is reason to be believe the surgery/surgeries will take place in another hospital, its incentives may push it to wait for conditions that would result in a delayed match, one that results in reduced lives saved. If participants in a market feel that a market can be unsafe, it can cause a market not to be as effective as it otherwise could.

These are not just academic discussions. Roth started his career in academia, but has increasingly participated in industry as market failures have resulted in calls for better market designs. Roth goes deep into detail in his work designing a better system for student application systems for high schools in a few US cities. Previous systems had a number of problems, and a better market design has made both schools and students get better matches with their preferences.

I highly recommend the book if this topic interests you.

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