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

­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.

Topics

Tags

Comments

Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The history of the macroeconomic divide

What’s at stake: Following up on his mathiness critique that economic theory is becoming a sloppy mixture of words and symbols, Paul Romer wrote a series of blog posts over the past few weeks discussing how things went so far off in the macroeconomic field, where a group (often referred as fresh-water economists) completely retreated from scientific engagement with macroeconomists who disagreed with them and gave up on using evidence to evaluate models.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: August 24, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The decline in market liquidity

Has it become harder for buyers and sellers to transact without causing sharp price movements?

By: Jérémie Cohen-Setton Topic: Finance & Financial Regulation Date: August 12, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Understanding the Neo-Fisherite rebellion

The idea that low interest rates are deflationary – that we’ve had the sign on monetary policy wrong! – started as a fringe theory on the corners of the blogosphere 3 years ago. Michael Woodford has now confirmed that modern theory, indeed, implies the Neo-Fisherian view when people’s expectations are infinitely rational.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: July 19, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Restructuring in the US currency union

On June 28, the governor of the Commonwealth territory announced that it would not be able to repay its debt. Puerto Rico has since asked Congress to change the law to make the tools that U.S. municipalities can use to restructure their debt through Chapter 9 available to its territory. 

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: July 12, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Wage and price inflation

What’s at stake: For the past few months, the Fed has been in a "wait-and-see" mode to assess the strength of the US recovery. In particular, it has been waiting for signs that employment gains translate into wage pressures before beginning its tightening cycle. Although wage gains remain useful to assess the amount of slack in the labor market, the connection between wage and price inflation appears less mechanical than in the past.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: July 5, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The 4% growth target

What's at stake: To contrast with President Obama’s middle class economics, the Republican Party – from Rand Paul’s proposal to repeal the entire IRS code to Jeb Bush’s 4% growth target – is positioning itself as the party that can drastically expand potential growth in the 2016 presidential election.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: June 22, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The empirical shift in economics

Rather than being unified by the application of the common behavioral model of the rational agent, economists increasingly recognize themselves in the careful application of a common empirical toolkit used to tease out causal relationships, creating a premium for papers that mix a clever identification strategy with access to new data.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: June 14, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The economics of parallel currencies

As Greece faces a severe shortage of euros, the idea of introducing a parallel currency used for some domestic transactions – while keeping the euro in place for existing bank deposits and for foreign transactions – has made a comeback.  Although historical examples of parallel currencies exist, the analysis of the idea remains in its infancy. It remains unclear whether and how one could find the right mechanics. 

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: June 8, 2015
Read article More by this author

Blog Post

Jérémie Cohen-Setton

Mathiness in economics

What’s at stake: Growth economist Paul Romer has caused a stir over the past few weeks in the blogosphere with a paper, first presented in January at the annual meeting of the American Economic Association and recently published, which argues that economic theory is becoming, more often than not, a sloppy mixture of words and symbols.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 8, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The residual seasonality puzzle

While seasonal adjustment is generally considered uninteresting, the repetition of low first quarter GDP releases since 2010 has led many to wonder if a predictable seasonal pattern remains in the published data. The U.S. Bureau of Economic Analysis is investigating the issue and will report on its findings in July.

By: Jérémie Cohen-Setton Date: May 26, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Is the economy stationary?

What’s at stake: The question of whether capitalist economies are self-correcting and will eventually revert to mean growth has received renewed interest given the underperformance of most economies six years after the onset of the Great Recessions. While the idea of persistent high unemployment was central to Keynes’ General Theory, it was quickly abandoned by the neoclassical synthesis.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: May 18, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Macroeconomic performance and election outcomes

The results of last week’s election in the UK have generated a debate on the role of macroeconomic performance in electoral success and, in particular, on whether elections hinge on an incumbent’s overall record or on whether things are improving in the election year.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: May 12, 2015
Load more posts