The past decade has
witnessed the introduction of novel market designs based on a variety of
different principles. The designs range from simple auctions like those at eBay
and Amazon, which aim mainly to provide secure, low-cost trading environments,
to the tatonnement-like radio spectrum and electrical power auctions, which aim
to find efficient allocations and competitive prices, to matching procedures
and package auctions, which are supposed to work even where equilibrium prices
don’t exist.
This course opens
with a systematic treatment of the primary literatures relied on by market
designers: auction theory and matching theory. The first eight weeks provides a
comprehensive introduction to the material, mainly using the books listed
below.
Milgrom, Paul
(2004). Putting Auction
Theory to Work.New York:
CambridgeUniversity
Press.
Roth, Alvin and Marilda
Sotomayor (1990).Two-Sided
Matching:A Study in Game-Theoretic
Modeling and Analysis, New York:
CambridgeUniversity
Press.
The Roth-Sotomayor
book (hereafter “TSM”) is faithful to
the original articles, while the Milgrom book (hereafter “PATW”) deviates from the originals in an effort to unify and
synthesize the literature. Serious students of auction theory should also read
the originals of several of the articles cited at the end of each chapter,
particularly the “especially recommended” readings listed below.
The most important
articles in auction theory have been collected and reprinted in a two-volume
set, as follows:
Klemperer, Paul
(2000). The Economic
Theory of Auctions.Cheltenham: Edward Elgar Publishing.
Roth, A.E. "The Evolution
of the Labor Market for Medical Interns and Residents: A Case Study in Game
Theory", Journal of Political
Economy, Vol. 92, 1984, 991‑1016.
Roth, A.E. and X. Xing"Jumping the Gun:Imperfections and Institutions Related to
the Timing of Market Transactions,"American Economic Review,
84, September, 1994, 992-1044.
April 5
Vickrey auctions.
PATW through
chapter 2 and references therein. Especially recommended is:
1.Roth, A. E. and Elliott Peranson, The
Redesign of the Matching Market for American Physicians: Some Engineering
Aspects of Economic Design American Economic Review, 89, 4, September, 1999,
748-780. http://www.economics.harvard.edu/~aroth/papers/rothperansonaer.PDF
2.Kagel, John H. and A.E. Roth, "The dynamics of
reorganization in matching markets: A laboratory experiment motivated by a
natural experiment," Quarterly Journal of Economics, February, 2000,
201-235.
3.Roth, A.E."A Natural Experiment in the Organization of Entry Level Labor
Markets:Regional Markets for New
Physicians and Surgeons in the U.K.",
American Economic Review, vol. 81, June 1991, 415-440.
May 10
Effects of a Match
1.Niederle, Muriel, and Alvin E. Roth, “Relationship
Between Wages and Presence of a Match in Medical Fellowships”, JAMA, Journal
of the American Medical Association, vol. 290, No. 9, September 3, 2003,
1153-1154. http://www.stanford.edu/~niederle/JAMA.Niederle.Roth.2003.pdf
3.Kamecke, Ulrich, "Wage
Formation in a Centralized Matching Market," International Economic Review, 39, 1, February, 1998, 33-53.
4.Niederle, Muriel and Alvin E. Roth, “Unraveling
reduces the scope of an entry level labor market: Gastroenterology with and
without a centralized match,” Journal of Political Economy, 1. 111, no. 6,
December 2003, 1342-1352. http://www.economics.harvard.edu/~aroth/papers/gastro.pdf
5.McKinney,
C. Nicholas, Muriel Niederle, and Alvin E. Roth, (2003) “The collapse of a
medical labor clearinghouse (and why such failures are rare),” working paper.
6.Niederle, Muriel, and Alvin E. Roth, “The Gastroenterology fellowship match: how
it failed, and why it could succeed once again”, in preparation.
7.Frechette, Guillaume, Alvin
E. Roth, and UtkuUnver,
“Unraveling Yields Inefficient Matchings: Evidence from Post-Season College
Football Bowls” (in preparation).
May 12
Decentralized
Markets I
1.Avery,
Christopher, Christine Jolls, Richard A. Posner,
and Alvin E. Roth (2001), “The
Market for Federal Judicial Law Clerks”, University of Chicago Law
Review, 68(3), Summer, 793-902.
2.Avery,
Christopher, Andrew Fairbanks and Richard Zeckhauser, The Early Admissions Game:Joining the Elite, HarvardUniversity Press, Cambridge,
MA2003.
3.Haruvy, Ernan, Alvin E. Roth,
and M. UtkuÜnver (2001),
“The Dynamics of Law Clerk Matching: An Experimental and Computational
Investigation of Proposals for Reform of the Market,” October 2001.
4.Roth,
A.E. and X. Xing "Turnaround Time and Bottlenecks in Market Clearing:
Decentralized Matching in the Market for Clinical Psychologists,"
Journal of Political Economy, 105, April 1997, 284-329.
Li, Hao
and Sherwin Rosen, "Unraveling in Matching Markets," American Economic Review, Vol. 88,
1998, 371-387.
Li, Hao
and Wing Suen, "Risk Sharing, Sorting,
and Early Contracting", Journal
of Political Economy, Vol. 108, 2000, 1058-1091.
Suen,
Wing "A competitive theory of equilibrium and disequilibrium in
two-sided matching", RAND
Journal of Economics, 31, Spring 2000,
101-120.
Niederle,
Muriel, Alvin E. Roth, and M. UtkuÜnver, (in preparation) “Unraveling Results from Comparable Supply and Demand.”
May 19
Guest lecturer: Robert Wilson on electricity markets
May 24
Guest lecturer: Atila Abdulkadiroglu on matching students
to schools
May 26
Guest lecturer: Jon Levin on Timber Auctions.
May 31
Memorial
Day: no class.
June 2
Guest lecturer: Jeremy Bulow on "Matching and Price
Competition”
Assignments and Grading
There will be occasional homework assignments (notgraded)
to allow you to check your knowledge of the material.
Your grade will be determined by a paper on the
subject of market design. One useful kind of paper will analyze either an existing market or an environment with a
potential role for a market, describe the relevant market design questions, and
evaluate how the current market design works and/or propose improvements on the
current design. Some ideas for such a paper have been gathered by Al Roth and
Estelle Cantillon and are included on the course website.
Another
kind of paper attempts to expand the theory. Most such papers involve more
difficult and longer investigations that may develop into a doctoral thesis. Among
the theoretical questions that appear possibly to be ripe for investigation are
the following ones:
Search and
interviewing before matching: should I interview someone who is
unlikely to come? What effect does that decision have on the matching process?
Matching with
common value uncertainty: what offers will a hospital make at
equilibrium when there is common value uncertainty about doctors?
Who should call
the bids?: What is the precise relationship between clock auctions, in
which the auctioneer calls the bids and there may be no standing high
bidder from round to round, and the simultaneous ascending auction, in
which the bidders call their own bids?
Package
exploration: Suppose each bidder can propose one package and the
auctioneer then uses those to form, say, an algebra
of allowed packages before an auction is run. What are the incentives for
bidders in various auctions to name efficient packages?
Proxy auctions
with incomplete information: What can we say about equilibrium in the
A-M proxy auction with incomplete information? Are there general reasons
to suspect these are more efficient than B-W menu auctions?
Characterizing
substitutes: The substitutes condition is
characterized in terms of a demand function. How can we characterize it in
terms of a profit function (as a function of inputs) or a technology?
Complexity and
equilibrium: In an Ausubel-Milgrom ascending proxy auction with
incomplete information, under what conditions would we expect the bidders
to adopt semi-sincere strategies? For example, what happens if bidders are
uncertainty averse?
Cognitive
Burdens: How can combinatorial auctions be
designed to minimize the cognitive burden on bidders? (For a start, see
Parkes and Ungar (2000).)
What follows below is copied with minor edits
and additions from the course web page of Harvard Professors Al Roth and
Estelle Cantillon...
Market design ideas are all over.Here are some thoughts on what some might
look like…The topics, references, and
URL’s are meant merely to be suggestive, not in any way comprehensive…
Academic papers to journals (law
reviews work very differently from economics articles, for example.)See http://www.bepress.com/for multiple journals that share one
review.
Markets as tools for aggregating information: the Iowa electronic markets (http://www.biz.uiowa.edu/iem/about/),
Plott (2000), Markets as information aggregation tools, Southern
Economic Journal, 67, 1-15.
Credit and insurance: credit circles
Vaccines
In addition, John McMillan's Reinventing the Bazaar and AjitKambil and Eric van Heck's Making
Markets are two examples of recent books covering a wide array of markets (the
second book has a heavier emphasis on electronic private marketplaces).
