Senior Economist from the Victorian Department of Treasury and Finance, Geraldine Anthony, reviews Nobel Prize winning economist, Alvin Roth’s latest book.
Alvin Roth has written a new, very accessible book, all about how markets work and why. In ‘Who Gets What – and Why’ he provides a clear explanation of what economists mean by a matching market. He looks at how these work and compares them with what we traditionally think of as a market. Along the way he shares a lifetime’s experience in policy reform – the wins and the losses – yes even Nobel Prize winners don’t win at everything.
This book will surprise you with just how many of life’s daily chores involve a matching market – how do you get what you want and how do others provide this – often without any money changing hands. How do your children get into their preferred schools, how do workers find jobs, how do couples find each other and how are donated organs allocated?
Traditionally economics has concentrated on markets for goods and services where price does all the work to decide who gets what. But attention is now turning to markets where there is no price. How do these markets work? What are the factors that make them work best and how can we influence these?
The lived examples in Roth’s work show just how important the rules of the market are and how small adjustments can make significant changes to how the markets work. He provides examples where the small adjustments have meant much better outcomes for those in the market. For example, the Boston school enrolment process used a set of rules to determine which students were accepted at which schools, based partly on student preferences. But the rules worked to discourage students who wanted to attend popular schools from truthfully stating their preferences, because to do so might mean they would lose out on the opportunity to be considered for their second or third preference schools to students who had put these schools lower on their preferences. A small change to how preferences were allocated meant that, while students were still not guaranteed their first preference, they could be guaranteed their highest preference possible and no one would with a lower preference would beat them for that place. Students could now truthfully reveal their preferences and no strategising was necessary.
Of particular interest to those involved in policy reform are Roth’s stories of innovations in market design that got close to implementation but, for a variety of reasons, failed to materialise. So other policy reforms should take heart from these stories of failure.