Nobel Prize for “Market Design”

This year’s Nobel-ish prize in economics goes to Alvin Roth and Lloyd Shapley for research on “matching methods” and the resulting application to “market design.” Briefly, this work deals with allocating resources in the absence of money and prices. Shapley applied noncooperative game theory to study the properties of different matching rules, and Roth studied various allocation rules to encourage “efficient” matching of actors or traders without using prices.

A good nontechnical summary of Roth’s work appears in a 2009 Harvard Business Review article. I discussed some of the issues in a 2007 blog post. There I noted that while the very idea of “market design” appears oxymoronic to those steeped in Menger, Mises, and Hayek, most of the work by Roth and colleagues deals with regulated markets, and can hence be interpreted as research in regulatory reform. More generally, none of this work deals with “designing markets” in the broad sense, but rather with narrow, technical issues in administrative design. (E.g., who gets to propose the first trade? How many potential trades are considered in each round? Etc.) As one friend of mine remarked, “this is 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.”

Note that the study of resource allocation without money and prices is part of praxeology, but not what Mises called catallactics, the study of market exchange with monetary calculation. Mises includes the economic analysis of socialism and war, and parts of Crusoe economics, as within the non-catallactic parts of praxeology, but there has been relatively little work by Austrians in this area. Some of my own research on resource allocation within the firm could fit, as does Mises’s analysis of bureaucracy.

Update: Is it economics? Two contrasting views. Steve Levitt:

[T]he first time I read Roth’s work in this area I had a strong reaction: this isn’t really economics. His applications, while based on general theories and principles, involve solutions that are highly dependent on the particular institutions and quirks of the setting he is studying.  In my youth, I was under the illusion that economic principles should be universal.  It was in part through my appreciation of Roth’s work, that I came to think very differently about the world and appreciate how critical it is to think about the specifics of the setting when coming up with solutions.

Charles Rowley:

The contributions of Roth and Shapley represent grunt work that can easily be provided by computer novices.  In environments where markets do not – or are not allowed – to function an infinite number of matching solutions vie for attention. Pick your preferred outcome and program the computer to deliver it.  Then sit back, hope that the Committee shares your prejudices, and wait for the 3 am call from Sweden!

Comments

  1. I read the HBR article. Interesting read, but a couple things stike me:

    1. The term “market” is used so broadly as to have practically no discernable meaning. Whether Roth was writing about the kidney or medical labor markets, it struck me that these were areas in which markets were prevented from forming due to weak, if not nonexistent, contract rights. Offer and acceptance did not create an enforcable contractual obligation in either of these so called markets.

    2. The clearninghouse Roth designed for medical labor is clearly not a free market. In order to insure that the gastroenterology programs did not break ranks, he created a resolution that in effect destroyed the contract rights of any non-clearinghouse participants. Obviously, he felt it necessary to destroy the nascent free market that was trying to form in order to force these programs to participate in his “market” design, thereby insuring as all top down central planners must do, that theirs is the only game in town.

    3. Roth appears to have little understanding of what makes free markets work. His three must-haves — thickness (enough buyers and sellers), safety (i.e. the willingness of participants to reveal and act upon their true intentions), and congestion that thickness can bring (i.e. too many choices and not enough time to analyze and make the right one) — illustrate this. There’s nothing at all here about individual freedom, the harmony of interests, property rights, enforcable contract rights, or the creation and mutual exchange of value (i.e. profit and loss) such that each participant in the market place is made better off for having particpated. His three must-haves are necessary for designing a game, which is all that he has done here. Games, at best, mimic reality. They are no substitute for it. Likewise, Roth’s concepts for market design mimic a free market. They are no substitute for it.

    4. So, is there any value here? I think some, but certainly not Nobel prize in economics value. The value of Roth’s work is very limited, and applies only to situations in which free markets cannot form. The test cases he sites to test his “market design” concepts — kidney, medical labor, school choice “markets” — are not “situations in which free markets cannot form.” Instead, they are situations in which free markets have been prevented from forming. IMO, The formation of free markets in these situations would solve the problems that a Roth-like market design solution can only pretend to solve.

  2. [...] La Academia de ciencias sueca ha seleccionado a dos economistas estadounidenses como ganadores del Premio Nobel en Economía del año 2012. Albert Roth y Lloyd Shapley fueron los elegidos. El tema que los ha hecho merecedores del premio es el de “market design”, cómo hacer para que en situaciones donde no hay precios de mercado existan transacciones entre los agentes económicos que sean lo más eficiente posibles, dadas las restricciones institucionales para que se formen precios de mercado. Comentarios sobre el tema acá, acá, acá y acá. [...]

  3. Also, you shouldn’t be turned off by the term “market design.” A “market,” in mainstream economics, is just an allocation mechanism. Even an an-cap society would have a variety of these. Some of the oldest and most free-market institutions are an example of market design: auctions. The Dutch flower market, eBay, QuiBids, the stock market, are all allocation mechanisms and examples of market design. Private companies often hire economists to design markets in order to assist in making their businesses more efficient or in order to be consulted on how to optimally act in specific markets. “Market design” is very free market.

  4. For those of you unaware, this matching process isn’t to tout the efficacy of non-price-based allocations. It’s more an attempt to provide order to an already regulated area, much in the same sense economists designed a price-based market to NASA in order to efficiently allocate scarce parts to build the Cassini spacecraft:
    http://askmagazine.nasa.gov/issues/28/28s_cassini_resource.html

    Roth in his 1984 paper describes the history and process used in matching newly graduated students from medical schools (interns) to hospitals. Today, medical school graduates in the United States are assigned internships at hospitals through a process called the National Resident Matching Program (NRMP). Prior to NRMP, the market was a bilateral negotiation system where hospitals would contact students to secure them as interns. Competition among hospitals resulted in a spiral of earlier and earlier dates of contact between hospitals and medical students until medical students and hospitals were concluding agreements for post-graduation employment up to two years prior to graduation. The market was characterized by chaotic last minute recontracting, with students seeking to improve on the positions they had been firmly offered (and had sometimes accepted) by contacting the hospitals they preferred, and with hospitals sometimes pressuring students into premature decisions in order to be able to contact promptly students on their waiting lists.

    The NRMP was introduced to create order in a market in which money exchange is forbidden by State decree. The process begins with hospitals supplying a rank order of the interns they are interested in hiring, and the number of openings they have available. Medical school graduates then submit a ranked list of the hospitals they are interested in obtaining an intern position. Once the rank order list is submitted to the National clearinghouse, an algorithm takes the rank order lists and determines the match. The algorithm that is used is equivalent to the deferred acceptance algorithm of Gale and Shapley in their 1962 paper. This algorithm involves a number of iterations. The initial step is eliminating from any graduate‘s list any hospital that did not rank him and to eliminate from any hospital‘s list any graduate that did not rank that hospital. The next step in the algorithm begins by first selecting any graduate‘s list and temporarily assigning him to the top ranked hospital on his list. Next another graduate‘s list is selected. That graduate is then assigned to his top choice unless it conflicts with a previous choice of a graduate. If there is a conflict, it is resolved by looking at the hospital‘s list and temporarily matching them with the graduate they rank higher in the conflict. The graduate who is now unassigned is matched with the next highest rank hospital on his list unless there is a conflict in which case the conflict is broken by the hospital‘s list. The process continues until the lists are exhausted or if every graduate is matched.

  5. I am a little befuddled about this award. With all the horrible news and uncertainty with the markets, this guy is going to save us by matching up kidneys with patients and kids with schools? I think on the surface “market design” seems like it wouldn’t have a much to do outside of the “narrow, technical” situations.. Much further underneath, I believe, is the opportunity for statists to use this nifty program to help in their design of the military-medical-educational-regulatory-complex.

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