HT up front to
The Conversable Economist for this pull-quote:
God makes wheat, but the Chicago Board of Trade makes #2 hard red winter
wheat. It has a lot less variance than wheat. You know what you’re
going to get and, therefore, you don’t have to care who you’re buying it
from....
From the Federal Reserve bank Of Minneapolis
Published June 15, 2015
In “normal” markets,
prices adjust to equate demand and supply; the market clears. This
simple premise is at the core of economic thought. But with surprising
frequency, prices are not enough and can even be irrelevant. These
markets are broken in the sense that price adjustment won’t clear them,
and economists have long struggled to understand efficient allocation
in such cases.
Alvin Roth began
studying these “broken” markets in the 1970s. Decades later, in 2012,
this body of work was recognized with the Nobel prize. By extending
theory developed by mathematician Lloyd Shapley, his Nobel
co-recipient, Roth had “generated a flourishing field of research and
improved the operation of many markets,” said the Nobel committee. “An
outstanding example of economic engineering.”
Roth’s theoretical,
empirical and experimental research has transformed how medical
residents find jobs, parents find good schools for their children and
renal patients find kidneys that save their lives. Economics is often
deemed impractical—too abstract from the real world to have pragmatic
importance. Roth’s career is solid refutation of that notion.
Inspired by Shapley’s
mathematical proof with David Gale that stable matches—those in which
currently paired partners see no benefit from a different match—can
exist in theory, Roth discovered that the mechanism used successfully
since the 1950s to match U.S. medical residents with hospital jobs was
quite similar to the Gale-Shapley algorithm. This careful analysis led
to a 1995 invitation from doctors who had found that the growing number
of married couples seeking hospital posts undermined the existing
algorithm. No longer were matches stable. Roth helped redesign the
algorithm, used with success ever since.
Similar analysis and
redesign have been at the heart of Roth’s work, applied to kidney
donations, public schools, law student clerkships and a wide variety of
health care labor markets. Others have extended it into financial
intermediation, Internet advertising auctions and even dating services.
He addresses many of these topics in the following conversation, along
with the success of experimental economics, the ubiquity of
“repugnant” markets and the vital importance of coffee.
MATCHING MARKETS
Region: Perhaps we could begin with some general
background on matching markets. In your Nobel lecture, you said, “You
can’t just tell Google that you are showing up for work. They have to
hire you.”
Roth: They do indeed.
Region: And you continued: “Matching markets are
markets in which you can’t just choose what you want (even if you can
afford it). You also have to be chosen.”
That suggests that prices alone don’t clear markets in certain
cases. Could you elaborate on which markets that applies to, and why
prices don’t equate supply and demand in those situations?
Roth: Well, it might be easiest to first talk about commodity markets because they are markets where we think price does do all the work. It takes a lot of design to make something into a commodity market....MUCH MORE
In “normal” markets, prices adjust to equate demand and supply; the market clears. This simple premise is at the core of economic thought. But with surprising frequency, prices are not enough and can even be irrelevant. These markets are broken in the sense that price adjustment won’t clear them, and economists have long struggled to understand efficient allocation in such cases.Alvin Roth began studying these “broken” markets in the 1970s. Decades later, in 2012, this body of work was recognized with the Nobel prize. By extending theory developed by mathematician Lloyd Shapley, his Nobel co-recipient, Roth had “generated a flourishing field of research and improved the operation of many markets,” said the Nobel committee. “An outstanding example of economic engineering.”Roth’s theoretical, empirical and experimental research has transformed how medical residents find jobs, parents find good schools for their children and renal patients find kidneys that save their lives. Economics is often deemed impractical—too abstract from the real world to have pragmatic importance. Roth’s career is solid refutation of that notion.Inspired by Shapley’s mathematical proof with David Gale that stable matches—those in which currently paired partners see no benefit from a different match—can exist in theory, Roth discovered that the mechanism used successfully since the 1950s to match U.S. medical residents with hospital jobs was quite similar to the Gale-Shapley algorithm. This careful analysis led to a 1995 invitation from doctors who had found that the growing number of married couples seeking hospital posts undermined the existing algorithm. No longer were matches stable. Roth helped redesign the algorithm, used with success ever since.Similar analysis and redesign have been at the heart of Roth’s work, applied to kidney donations, public schools, law student clerkships and a wide variety of health care labor markets. Others have extended it into financial intermediation, Internet advertising auctions and even dating services. He addresses many of these topics in the following conversation, along with the success of experimental economics, the ubiquity of “repugnant” markets and the vital importance of coffee.Photos by Peter Tenzer
