Blog Post

Blogs review: Markets without a price

What’s at stake: Lloyd Shapley and Alvin Roth have won the Nobel Prize in economics “for the theory of stable allocations and the practice of market design”, which relate to the study of social allocation problems where money as a medium of exchange is ruled out or at least constrained. Roth has built on the insight of Gale and Shapley to come-up with precise conditions under which market design can achieve efficient allocations and has applied these lessons to a variety of real world matching problems such as organ exchange, college admissions and the design of the economics Job Market.

By: Date: October 19, 2012 Topic: Global Economics & Governance

­What’s at stake: Lloyd Shapley and Alvin Roth have won the Nobel Prize in economics “for the theory of stable allocations and the practice of market design”, which relate to the study of social allocation problems where money as a medium of exchange is ruled out or at least constrained. Roth has built on the insight of Gale and Shapley to come-up with precise conditions under which market design can achieve efficient allocations and has applied these lessons to a variety of real world matching problems such as organ exchange, college admissions and the design of the economics Job Market.

Welfare gains in priceless allocations and the future of repugnance

Greg Ip writes that money is a handy way of denominating prices and economists love prices because they are so efficient at allocating supply and demand so as to maximize welfare. Yet markets do not have to have money or prices to serve that welfare-maximizing function. That distinction lies at the heart of the work that won this year’s Nobel Prize in economics.

Arindrajit Dube (HT Mark Thoma) writes that the concrete applications that are discussed as ways of "improving the performance of many markets" – such as matching residents to hospitals, matching donors to organs, and students to schools – are not really "markets." At least not if we think of markets as institutions where prices help clear supply and demand. Instead, they involve non-market interactions, where the matches are actually formed by centralized exchanges.

In a recent essay (HT Stephen Dubner), Al Roth argues that an important constraint for the existence of a clearing price is repugnance – the distaste for certain kinds of transactions – which acts as a real constraint, every bit as real as the constraints imposed by technology or by the requirements of incentives and efficiency. Roth points in JEP paper that repugnance borders do shift over time, although quite slowly. The author considers a range of examples from lending money for interest to bans on eating horse meat in California to bans on dwarf tossing in France.

The Gale-Shapley deferred choice algorithm and the “socialist calculation” debate

Alex Tabarrok writes that the field of matching may be said to start with the Gale-Shapley deferred choice algorithm. Here is how it works, applied to men and women and marriage. Each man proposes to his first ranked choice. Each woman rejects any unacceptable proposals but defers accepting her remaining suitors. Each rejected man proposes to his second ranked choice. Each woman now rejects again any unacceptable proposals, which may include previous suitors who have now become unacceptable. The process repeats until no further proposals are made; each woman then accepts her most preferred suitors and the matches are made.

Timothy Taylor writes that another key insight is that although the deferred-acceptance procedure is usually explained as a step-by-step process, where parties make one offer at a time, an equivalent process can be run by a clearinghouse, if the parties submit sufficient information. And this is where Alvin Roth enters the picture, bringing in detailed practical implications for analysis. As one might expect, these real-world cases raise various practical problems. Are there ways of gaming the system by not listing your first choice, which you are perhaps unlikely to get anyway, and pretending great enthusiasm for your fifth choice, which you are more likely to get? Such outcomes are sometimes possible in practical settings, but it proves much harder to game these mechanisms than one might think. Usually, you’re better off just giving your true preferences and seeing how the mechanism plays itself out.

 

Source: Super Freakonomics Illustrated

To implement the Gale-Shapley algorithm for the marriage market yourself, you can visit UC Berkeley’s Mathsite.

Arindrajit Dube writes that mathematically speaking, the Gale-Shapley algorithm is part of a class of optimal matching algorithms, which is equivalent to the Monge-Kantorovich optimal transport solution, a signature accomplishment of Soviet mathematics. A popular view today is that it is not possible to implement an efficient allocation using planning because people don’t have the incentives to reveal their true preferences to begin with, which makes this whole exercise rather pointless. A variant of this position was originally articulated by Austrian economists, including Ludwig von Mises, during the so called "socialist calculation" debate of the early 20th century. And in many cases this criticism rings true. However, it does not follow that the truthful revelation problem is ubiquitous. For example, it is interesting to note that Alvin Roth and Elliott Peranson show that when implementing optimal matching, this problem may be smaller than one might imagine: when each applicant only interviews a small number of positions overall, the gains from strategic manipulation of preferences are small. This, too, has important implications for the "socialist calculation" debate, as it suggests that for a range of cases, a centralized exchange implementing planning without using prices can (and indeed does) implement relatively efficient allocations.

Joshua Gans writes that Roth has set down a set of principles for market designers. Basically, market design works when you can find rules that encourage thickness (lots of buyers and sellers), avoid congestion and are safe (that people think transactions will actually take place on the terms agreed). Put those things together and you are a good way to having yourself a well-functioning market.

The design of the Economics Job Market… and that of the NFL

Al Roth is also the chair of the AEA’s Ad Hoc Committee on the Job Market. The first of the Committee’s recommendations to be put in practice was the Economics Job Scamble, a web page on which applicants and employers could indicate their continued availability as of late March. The second, which went online November 20, 2006, is that the AEA will facilitate Signaling for Interviews in the Economics Job Market, to allow applicants to send up to two signals to employers with whom they would like to interview. In a email to Greg Mankiw, Al Roth explains that just as the idea of the scramble was to add some thickness to the late (March-April) part of the market, the idea of signaling is to reduce some of the congestion in the thick, January interviews part of the market.

Real Time Economics write that now that Roth and Shapley have won the Nobel, the NFL will finally listen to what they have to say. In 2010 article, three Harvard University researchers who studied market design under Roth argues that the National Football League has one of the worst systems in all of industry for matching talented workers with the right employers. They then helped create a new system for the NFL’s draft. But the NFL did NOT take the Nobel-worthy advice.

The Shapley value

Joshua Gans writes at Digitopoly that Lloyd Shapley is best known in economics for the Shapley value, which is a way of thinking about who might capture value in a multi-lateral negotiation. Henrik Jensen writes that the concept was applied to political decision making together with Martin Shubik in 1954, as the Shapley-Shubik index. It is a simple index that measures the voting power of parties, and, in particular, shows that number of seats in a committee or parliament is not the same as power. It is the power of the coalitions in which a party can be decisive, i.e., pivotal, that matters.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Dial N for NAIRU, or not?

What’s at stake: The concept of the NAIRU (Non-Accelerating Inflation Rate of Unemployment) has recently divided the minds in the economic blogosphere. We review the most important contributions on its usefulness, its shortcomings, alternatives and we discuss why it is such a contested concept.

By: Pia Hüttl Topic: Global Economics & Governance Date: May 22, 2017
Read article More on this topic

Blog Post

Uuriintuya Batsaikhan
DSC_0794

UK economic performance post-Brexit

What’s at stake: Almost a year after the UK voted to leave the European Union, its economic performance has showed mixed results. The risks of a Brexit-induced recession do not seem to be materialising. On the contrary, up until the end of 2016 the UK saw a continuation of strong consumer spending and strong output in consumer-focused activities. However, the UK economy is showing signs of slowing down in the first quarter of 2017, with weak growth in the services sector and business investments. In addition, strong consumption growth started to cool down as individuals’ purchasing power declines due to a weaker exchange rate. This leads to a question whether it is the beginning of the Brexit slowdown. We review the contributions made on this topic in the last year.

By: Uuriintuya Batsaikhan and Justine Feliu Topic: European Macroeconomics & Governance Date: May 15, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The US and the productivity puzzle

What’s at stake: Productivity growth fell sharply following the global financial crisis and has remained sluggish since, inducing many to talk of a “productivity puzzle”. In the US, we may be seeing what look like early signs of a reversal. We review recent contributions on this theme.

By: Silvia Merler Topic: Global Economics & Governance Date: May 8, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Trump tax cut

What’s at stake: on Wednesday, the Trump administration - now 100 days old - unveiled a draft tax plan including the intention to enact a radical cut to the corporate income tax, lowering it to 15 percent. While we are still missing details on how this and other measures would be implemented, we review some of the early reactions.

By: Silvia Merler Topic: Global Economics & Governance Date: May 2, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The decline of the labour share of income

What’s at stake: at odds with the conventional wisdom of constant factor shares, the portion of national income accruing to labour has been trending downward in the last three decades. This phenomenon has been linked to globalisation as well as to the change in the technological landscape - particularly “robotisation”. We review the recent literature on this issue.

By: Silvia Merler Topic: Global Economics & Governance Date: April 24, 2017
Read article More on this topic More by this author

Blog Post

Uuriintuya Batsaikhan

Embracing the silver economy

What’s at stake: The oldest human in known history was a Frenchwoman called Jeanne Calment who celebrated her 122nd birthday in 1997. Thanks to advances in technology and medicine humans living until 100, if not 122, might not be an exception in the near future. Ageing, while described as a looming demographic crisis, also offers a silver lining. Business in rapidly ageing societies is already adapting their strategies to navigate the “silver economy”. This blogs review looks at the implications of the silver economy on growth, productivity and innovation as well as the opportunities offered by the silver industry.

By: Uuriintuya Batsaikhan Topic: Global Economics & Governance Date: April 10, 2017
Read article More by this author

Blog Post

OLYMPUS DIGITAL CAMERA

Is China’s innovation strategy a threat?

What’s at stake: A number of recent contributions accuse China of acquiring technology from abroad without respecting international rules. This blog reviews the current debate that focuses on China’s supposed push to modernise its industry and the challenges for advanced economies. By leapfrogging to high-tech manufacturing products, the strategy threatens the competitive advantage of the US and the EU. The international rules-based order is put to a test facing large-scale government support to high-value added sectors and anti-competitive behaviour.

By: Robert Kalcik Topic: Global Economics & Governance, Innovation & Competition Policy Date: April 3, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The American opioid epidemics

What’s at stake: The US Department of Health and Human Services (HHS) declares that the country is “in the midst of an unprecedented opioid epidemic”. Since 1999, the rate of overdose deaths involving opioids - including prescription pain relievers and heroin - nearly quadrupled. We review contributions looking at the economic drivers and implications of this phenomenon.

By: Silvia Merler Topic: Global Economics & Governance Date: March 27, 2017
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Alice in gender-gap land

What’s at stake: The International Women’s Day on 8 March drew attention to the gender gap again, both in pay and in employment. Ongoing research on the topic shows that the gender gap persists worldwide, from finance to arts. For it to change, bold action is needed, ranging from targeted policies to rethinking gender norms.

By: Pia Hüttl Topic: Global Economics & Governance Date: March 20, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Taxing robots?

What’s at stake: “More human than human”, was the motto guiding the Tyrell Corporation’s engineering of biorobotic androids, in 1982’s Blade Runner. Fast forward to 2016, and Bill Gates argues that if robots perform human work, they should be taxed like humans. We review what economists think about this idea.

By: Silvia Merler Topic: Innovation & Competition Policy Date: March 13, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

European identity and the economic crisis

What’s at stake: the EU prepares to mark the 60th anniversary of the Treaty of Rome, and the European Commission has presented a white paper “on the future of Europe”. However, some have argued that Europe is going through a serious identity crisis, whose roots are to be found in the economic crisis and whose implications could challenge further steps towards integration. We review the recent contributions to this debate.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: March 6, 2017
Read article More by this author

Blog Post

IMG_1985

The Trump market rally conundrum

What’s at stake: Since Donald Trump’s election in November, the US stock market has been on an unabated rally. The Dow Jones Industrial Average powered through the 20,000 mark for the first time in history. POTUS has been quick in using this financial bonanza as prima facie evidence of his early accomplishments. However, several commentators question the link between Trump’s unorthodox economic policy pledges, the stock market rally, and future growth prospects.

By: Alessio Terzi Topic: Finance & Financial Regulation, Global Economics & Governance Date: February 27, 2017
Load more posts