Tuesday, October 16, 2012

More on Market Design and the Nobel Prize

This morning the WSJ ran an editorial by David Henderson on the Nobel Prize. What is most interesting about this editorial is that after a very nice description of matching and market design, Henderson levels this charge:
There is a more fundamental solution to the kidney shortage. Don't "design" a market; simply allow one. A ban on selling kidneys is essentially a price control of zero and, like other price controls, causes a shortage. There are thousands of "demanders." There are also thousands of potential suppliers who, at a price of zero, are not willing to give up a spare kidney. A straightforward solution is to allow the sale of organs.
Now that the Nobel Peace Prize has been given to such an amorphous entity as the European Union, perhaps next year the Nobel in economics should go to the free market, which would do more than all the market designers to get kidneys to desperate people.
This kind of claim ("why not allow prices and transfers?") comes up all the time when research in market design and matching is discussed. It is a strong criticism because the price system and perfectly competitive markets allocate goods efficiently and are the gold standard against which other allocation methods must be measured. Roth has a couple of answers to this:

1) Some transactions are "repugnant" and a price-clearing market simply won't ever be allowed, but we should try to do the best we can anyway (e.g. Roth 2007 "Repugnance as a Constraint on Markets").

2) Market design is an "engineering approach" to solving economic problems; that is, it's "practical." When Roth is called in to "fix" a market, the solution needs to be arrived at quickly, and context of the market and politics surrounding the market matter (e.g. Roth 2002 "The Economist as Engineer"). Introducing prices, transfers, and perfectly competitive markets where they've never existed before might be too much to ask.

This Nobel Prize legitimizes the market design approach and is probably meant to quell some of these market-oriented criticisms. The prize will help give Roth more legitimacy and make it easier for him (and others) to take the market design approach to other problems. Economics is all about the allocation of scarce resources to satisfy competing ends. While economists usually turn to markets to do the job because of their efficiency properties, economics is not just the study of perfectly competitive markets. Economists can say something about allocating goods and improving efficiency outside of perfectly competitive markets, as well. And the Nobel Prize going to market design is a good reminder of that fact.

UPDATE: Tony writes about what Coase might think about market design and the Nobel Prize. Definitely worth a read. 

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