Virtual Visit at Alvin Roth’s Lab: Designing Markets

Visit the economics lab of market designer and 2012 Nobel Laureate Alvin Roth

One of the themes of the upcoming 5th Lindau Meeting on Economic Sciences, 19-23 August 2014, will be the practical value of economic research. Alvin Roth (co-recipient with Lloyd Shapley of the 2012 Nobel Prize) is an outstanding example of how economics can be very useful for dealing with real-world problems.

His applications of game theory have included designing markets for kidney exchange; mechanisms for school choice in big US cities; and efficient systems for getting doctors and economists into their first jobs. At the American Economic Association annual meeting back in 2008, I discussed this work with him in a Vox Talks audio interview.

One of the best known markets Roth has designed is the National Resident Matching Program, which was originally set up in the early 1950s as a centralised ‘clearing house’ for placing US medical students into their first employment. By the 1990s, the program’s algorithm for producing good matches between students and hospitals was in trouble, as growing numbers of female medical students meant rising numbers of medical couples had to be accommodated as spouses didn’t want to be separated.

In 1995, Roth was asked to design an improved algorithm to accommodate couples while being immune to both student misrepresentation and strategic manipulation by the hospitals. The new design was adopted in 1997 and now fills more than 20,000 positions a year.

Roth then turned his attention to education, where he helped design the system used in New York City to match approximately 90,000 students to high schools each year, starting in 2004. A similar suggestion was made for Boston, where parents were desperately navigating a system that often left primary school pupils swept into schools that weren’t even among their preferences. The proposal was accepted in 2005, and Roth has had similar success in Denver and Chicago.

In what seems a particularly ‘hands-on’ approach for a professor of economics, Roth and colleagues set up the New England Program for Kidney Exchange, using a similar game theory-based algorithm to match donor/recipient pairs. If, for example, a wife wants to donate a kidney to her ill husband but is not a genetic match, the Exchange will find a couple in a similar predicament to arrange a compatible swap. Ideally the system is designed for two couples to reduce the need to coordinate surgeries across the country, but it has worked for chains of up to six couples.

Roth’s work on kidney exchange led him to think about repugnant markets and prohibited transactions, which will be the focus of his Lindau lecture next month. In the case of kidneys, he notes, while no one opposes transplantation, including living donation, almost every country in the world has laws against paying for kidneys. Such repugnance has been a constraint on markets in many different and changing ways over time: buying and selling slaves, for example, were once acceptable while interest on loans was not.

Issues surrounding repugnant markets are discussed on Roth’s blog. He is also the first economics laureate to work with Lindau to produce a virtual tour of his lab, the results of which can be visited here.