Big Thinker Al Roth Engages Crowd in Frank Discussion on Market Design
In the 5th of the 2007 Big Thinkers Distinguished Speaker Series, Harvard University Professor Al Roth reviewed what he has learned about markets and the process of designing marketplaces to fix market failures. Game theory has become an important tool in market design with the detailed rules and procedures of economic institutions.
Roth explained that to work well, marketplaces must provide thickness, or attract a large enough proportion of the potential participants and transactions in the market. They also have to overcome congestion that thickness can cause by making it possible to consider enough alternative transactions in time. Lastly, there is the need to make it safe and simple to participate in the market. Roth drew on two recent examples of market design: kidney exchanges and school choices in New York City and Boston.
Kidney transplants are necessary for end-stage renal disease, but there is a shortage of kidneys. Lack of compatibility and laws against kidney sales open up the possibility of a market designed kidney exchanged to increase the number of transplants. Roth explained the need for national exchanges as opposed to regional exchanges to increase the thickness in the market; 3-way exchanges that will add to a population of incompatible donor pairs; and opening up kidney exchanges to compatible patient-donor pairs as well.
In the example of matching students to high schools in New York City and Boston, where thickness isn’t a problem, there were too many transactions that led to congestion in the market. As many as 30,000 students in New York City were assigned to schools not on their choice list. The newly designed system incorporated a centralized clearinghouse to which students would submit their true preferences, instead of unreachable choices. The algorithm ensured that more students got accepted to their realistic first preferences and minimized the number of those rejected into their second choice pools.
Near the end of his talk, Roth dived into a discussion about how certain market transactions are repugnant, which can be an important constraint on market design. Roth described repugnance as “transactions that some people don’t want other people to engage in.” He cited the example of how it’s against the law to eat horse meat in California. However, the true reason is because many Californians find it repugnant that anyone should eat a horse. This repugnance was enacted into law by popular referendum. A few other examples of repugnant transactions (at some point or place in time) that Roth pointed out included human remains for transplant, labor, adoption, surrogate mothers, and life insurance. Roth identified the irony in repugnant transactions in a section of his talk which elicited subtle laughter from the crowd. Dwarf tossing, as a form of entertainment, was banned in 2002 by the French and upheld by the UN as necessary to protect human dignity, even though it was argued by a participant of the sport that the essence of human dignity is his job. However, the sport of wife carrying continues to be legal.
Roth concluded by polling the audience to help them understand the concept of repugnance. He asked the audience to raise their hands if they would support the sale of kidneys. Approximately half of the audience members raised their hands. He followed that question by asking those with their hands raised to keep them up, then asked, how many of you would support the sale of eyes? After a collective groan, about half of those who raised their hands to the original question lowered their hands. Roth asked those who still had their hands raised if they would support the sale of hearts. All hands went down, along with the lights that signaled the conclusion of Roth’s popular talk.
