How bazaar

by Hautahi Kingi / 20 August, 2015
Alvin Roth takes the reader on an ideology-free tour of how markets can be made to work better.
Businessmen Handshake
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How do you donate a kidney to someone with an incompatible blood type? The answer lies in the magic of clever market design.

Alvin Roth’s fantastic new book, Who Gets What and Why, opens on an April morning in 2010. The scene is a hospital operating theatre. Four operating theatres to be exact, in four different cities, each containing an incompatible recipient-donor pair. Within each operating theatre, a kidney is removed from the donor then flown across the country. In one of the other three hospitals, a compatible recipient waits.

Because of the Kidney Exchange Market, which rearranges initially incompatible pairs into compatible ones, four grateful kidney recipients woke up later that morning with a brighter future. Importantly, although each kidney was received from a stranger, it remained the generosity of the loved one lying next to them that made the procedure possible.

The exchange of human kidneys highlights Roth’s ability to consider the full spectrum of human interaction as a potential marketplace. The markets that “determine some of the most important turning points in our lives” – from finding a job to getting married – do not conform to the classical model in which prices adjust to equate demand and supply.

In these markets, what or whom we choose must also choose us. You cannot take a job at Google by simply accepting the offered wage. You cannot attend Harvard by simply paying the tuition fees. Google and Harvard must also be willing to match with you. Roth’s work helps to explain how these so-called matching markets can sometimes fail, and how carefully designed interventions can overcome these failures.

Laced with historical references and personal anecdotes, the book offers a VIP tour of the inner workings of world marketplaces. From Silicon Valley giants such as Uber and Airbnb to the ancient marriage market of the Aboriginal Arunta tribe, the characteristics that determine market success or failure are shown to be remarkably consistent.

A market must be thick without being too congested. It must be quick without being too early. It must also have rules that protect the safety of its participants without compromising their ability to engage freely with one another.

Because of these universal rules of thumb, market design lends itself to the application of mathematical theory. Take the elegant Deferred Acceptance Algorithm, for example. Its application has greatly improved the outcomes of the high school choice market in US cities by ensuring all matches are stable – a school and a student can’t both be better off within a different match.

Roth is careful to point out, however, market design is not a perfect science. The application of theory must constantly evolve in response to careful observation. Market designers should view themselves as engineers, tweaking the rules of a market to reflect an increasingly nuanced understanding of the idiosyncrasies of that market within the many institutional and practical constraints that arise.

It is both a tribute to Roth and an indictment on the economics profession that the careful interplay between economic theory and practice remains almost solely his preserve. Within economics, his work stands out as the perfect blend of pragmatism and academic rigour.

Who Gets What And WhyWho Gets What and Why overcomes two common pitfalls of popular economics writing. It first distances itself from political ideology. Roth argues market design operates in the substantial space between unrestricted laissez-faire and communism. Like a wheel that can only turn freely with an axle and well-oiled bearings, free markets are only truly free to operate with well-defined rules.

More importantly, however, the book does not eschew the wonder and joy that come with a deeper understanding of economics. Roth reveals his fondest hope for the book is that it may unveil the economic world in a way that hikes with his botanist friend open his eyes to the natural world. Who Gets What and Why succeeds by restoring a human focus to the marketplace – that most ancient of human artefacts.

Who Gets What and Why, by Alvin Roth (HarperCollins, $34.99).

Hautahi Kingi is a final-year PhD student in the Department of Economics at Cornell University.

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