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 Global Economics & Governance Tags & Topics

­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

Macroeconomics in the crossfire (again)

What’s at stake: After a first go at macroeconomics and its flaws a year ago, Paul Romer kicked off the debate again with a recent essay on how macroeconomics has gone backwards. The way that this debate, along with the debate of the role of economics in general, feeds into today's election woes, has also attracted attention in the blogosphere.

By: Pia Hüttl Topic: European Macroeconomics & Governance Date: December 5, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Trumpocalypse now: first reactions

What’s at stake: this question should probably be re-formulated as “what’s NOT at stake?” On Tuesday 8 November, the US elected Donald Trump as its next President. Several aspects of Trump’s political and economic agenda appear extreme (we have previously focused on his stance on trade). After the initial shock, we review economists’ opinions on what has happened and what may happen. We will be coming back to this topic regularly.

By: Silvia Merler Topic: Global Economics & Governance Date: November 21, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Brexit and the law

What’s at stake: last week, the UK High Court ruled that the triggering of Article 50 - and therefore the Brexit process - should involve the UK Parliament. The Government will appeal the decision but this has created a new wave of uncertainty about the timing of Brexit, and on what this involvement can mean in practice. We review the different opinions.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 14, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Monetary policy at the time of elections

What’s at stake: At this week’s meeting, the Federal Reserve left interest rates unchanged. While this was largely expected, the economic blogosphere has been discussing whether and to what extent this is linked to the election, and what can be expected for the future.

By: Silvia Merler Topic: Global Economics & Governance Date: November 7, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Should we rethink fiscal policy?

What’s at stake: there has been quite some discussion recently on whether we should rethink the framework of fiscal policy in order to make it more appropriate and effective in a world where demand seems to be chronically anemic, inflation is low and the interest rates are likely to stay close to zero (if not negative) for a long time. According to some of the authors, in the Eurozone these concerns are particularly pressing.

By: Silvia Merler Topic: Global Economics & Governance Date: October 24, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Brexit, the pound and the UK current account

What’s at stake: UK PM Theresa May announced the intention to trigger article 50 by March 2017, the Pound Sterling crashed, and a dispute among Tesco and Unilever has resulted in Marmite shortage. Brexit means Brexit, and it continues to be highly discussed. It would be impossible to summarise all the economic blogosphere on Brexit. Our aim is to periodically update our readers on selected important aspects of what promises to be a long-lived topic of discussion. This time we are looking at economists’ view on the Pound crash and the UK current account.

By: Silvia Merler Date: October 17, 2016
Read article More by this author

Blog Post

Silvia Merler

The Deutsche Bank Frenzy and what it says about European banks

What’s at stake: The IMF recently published its Fall Global Financial Stability Report, which points to a decrease in short-term risk but building of medium-term ones. At the same time, European market has been nervous last week on the news that Deutsche Bank (Germany’s biggest bank) has been demanded USD14bn by the US Department of Justice to settle allegations that the bank mis-sold mortgage-backed securities before the financial crisis. While reports point to a possible USD5.4bn settlement, this turmoil raises a question of whether the European financial system is still weak, eight years since the crisis. We try to summarize the reactions in the blogosphere.

By: Silvia Merler Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 10, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Trumping Trade

What’s at stake: Trade is a central topic in the US presidential campaign, with both candidates expressing some degree of criticism about past trade policy. But while Hillary Clinton’s position could be described as a cautious scepticism, Donald Trump’s trade plans are more openly protectionist. His proposals include high tariffs on imports, renegotiating trade agreements and possibly US withdrawal from the WTO. After the first presidential debate, we review economists’ reactions and their assessment of Trumps trade policies.

By: Silvia Merler Topic: Global Economics & Governance Date: October 3, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Big in Japan

What’s at stake: This week saw two important Central Banks’ meetings, whose outcomes could hardly be more different. While the U.S. Federal Reserve left interest rates unchanged, the Bank of Japan introduced a big shift in its easing framework. BOJ committed itself to overshoot its inflation target of 2 percent, and introduced a targeting of the yield on ten-year Japanese government debt, initially at about zero percent. We review the economic blogosphere reaction to this latest monetary policy action.

By: Silvia Merler Topic: Global Economics & Governance Date: September 26, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The US infrastructure investment debate

What’s at stake: Infrastructure investment has been and will continue to be a prominent campaign theme in the run up to the US elections. Both Hillary Clinton and Donald Trump have promised significant public investment in infrastructure. For some time, the discussion has revolved around the opportunities and costs of increased government infrastructure spending.

By: Silvia Merler Topic: Global Economics & Governance Date: September 19, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Apple of Discord

What’s at stake: On August 30th, following the results of an in-depth state aid investigation started in 2014, the European Commission concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. The decision is based on state aid grounds: the Commission argues that two tax rulings issued by Ireland effectively granted Apple preferential treatment, which amounted to state aid. The Commission ordered Ireland to recover up to €13 billion (plus interest) from Apple, but the decision is controversial and opinion differ as to the effects it will have. We summarize reactions.

By: Silvia Merler Topic: Innovation & Competition Policy Date: September 12, 2016
Load more posts