Alvin Roth: Matching markets

00:00:00,000 –> 00:00:16,520 I’m Alvin Roth I teach economics in Stanford and we’re talking about markets in which prices don’t do all the work, markets in which there may not even be any prices.

00:00:16,520 –> 00:00:48,239 A commodity market is a market where prices do all the work. The job of the market is defined from moment to moment, the prices at which supply equals demand. You might care who you buy your morning cup of coffee from but they don’t care who they’re selling to, they’re happy to serve whoever comes in. So let’s think about some markets where prices don’t do all the work – college admissions, labour markets these are matching markets in which you can’t just choose, you also have to be chosen. You can’t just choose to work at Google you have to be hired.

00:00:48,239 –> 00:01:00,690 Wages are very important in those markets but wages don’t determine who goes where, there are lots of other things going on in these matching markets. These are relationship markets where you care with whom you’re dealing.

00:01:00,690 –> 00:01:29,850 There are also markets that we don’t allow to exist, that we don’t like to have any prices for. One that I’ve been involved with is kidney transplantation and it’s against the law just about everywhere in the world to buy a kidney. It’s not that there aren’t people who would be willing to buy a kidney, because they’re in desperate need, it’s not that there aren’t people who would be willing to sell a kidney, but it’s against the law everywhere in the world except the Islamic Republic of Iran. Everywhere else kidneys must be a gift.

00:01:29,850 –> 00:01:53,909 There’s a big shortage of kidneys for transplantation in the United States. This morning there are over a hundred thousand people on the waiting list for deceased-donor kidneys and thousands die every year because there aren’t enough kidneys for transplantation. One reason there’s a shortage of transplantable kidneys is that living donors are not always able to give to the person they want to give to.

00:01:53,909 –> 00:02:05,549 So that’s an opportunity for exchange because maybe you’re in that situation – you love someone and would like to give them a kidney but can’t and I love someone and would like to give them a kidney but can’t. But maybe I can give a kidney to your patient and you can give a kidney to my patient.

00:02:05,549 –> 00:02:31,270 So my colleagues and I, Tayfun Sonmez and M. Utku Unver and I, wrote a paper about kidney exchange and we sent it to all the kidney surgeons we could think of and only one answered us and that was Frank Delmonico and we helped him form the New England Program for Kidney Exchange which was a clearinghouse for exchanging kidneys in this way and about 10% of the living donor transplants in the United States right now are arranged through exchange.

00:02:31,270 –> 00:02:39,070 Buying and selling a kidney is what I call a repugnant transaction. It’s a transaction that some people would like to engage in but other people think they shouldn’t.

00:02:39,070 –> 00:03:15,520 One thing that has puzzled economists about repugnant transactions is puzzlement that anyone could object to Pareto-improving voluntary exchange. The most common way by which people used to buy passage across the Atlantic Ocean to come to America was indentured servitude. You would be sitting someplace in England and you didn’t have the fare to take a ship to Boston and the captain would say to you not a problem just sign these articles of indenture and when we get to Boston Harbour I will auction you off, you would be a five-year slave. That was a legal voluntary contract that is no longer legal in the United States and in most of the world.

00:03:15,520 –> 00:03:37,000 We decided that the problems of that market; the asymmetric information, the power imbalances were too great to try to fix the market by regulating it and instead we would simply forbid it. The existence and the importance of repugnant transactions comes up against this idea that capitalism among consenting adults is a Pareto-improving thing.

00:03:37,000 –> 00:03:51,790 One take away for students is that there’s a big variety of markets in the world and not all markets are commodity markets where the prices do all the work. Lots of markets are matching markets where you need mutual consent to arrange a transaction.

00:03:51,790 –> 00:04:10,570 Another takeaway for students is that there are constraints that markets have to meet. Some kinds of transactions, for example, are repugnant and we can’t simply buy and sell everything that we might like to but there might still be possibilities of arranging marketplaces that improve welfare.

00:04:10,570 –> 00:04:26,660 Economists often speak of markets but entrepreneurs speak about marketplaces. And marketplaces have to be designed, they have to be constructed. Part of what market design is trying to do in economics is to help us understand what needs to happen for markets to work well.

00:04:26,660 –> 00:04:32,710 The study of markets isn’t the study of money it’s the study of how people cooperate and coordinate and compete with one another.