Who Gets What – and Why

Who Gets What – and Why Plot Summary

Introduction

The economy is not just about the stock market or taxes; it is fundamentally about who gets what, and why. Traditional economics has long focused on commodity markets where prices determine allocation, but many of life's most important "markets" don't work this way. When you apply to college, interview for a job, or try to find a romantic partner, you can't simply choose—you must also be chosen. These matching markets require a different kind of economic analysis, one that examines how we find and choose each other when mutual selection is required. Market design represents a revolutionary approach to understanding and improving these matching processes. By studying why some matching markets thrive while others fail, economists have discovered that successful markets need three essential qualities: thickness (bringing together many participants), uncongested interactions (allowing enough time to consider options), and safety (making it risk-free to reveal true preferences). This perspective has transformed economics from a purely theoretical discipline into an engineering science that designs practical solutions for real-world problems, from school choice systems to kidney exchange programs. Through careful design interventions, economists are now helping create markets that function better for everyone involved.

Chapter 1: Markets as Human Artifacts: Beyond Traditional Economics

Markets are human creations, not natural phenomena. Though we often speak of "the market" as if it were a force of nature like gravity, markets are actually intricate social technologies built to solve coordination problems. This recognition forms the foundation of market design, a new approach to economics that views markets as engineered systems that can be improved upon rather than mysterious mechanisms to be left untouched. Traditional economics has long focused on markets where prices do all the work—like stock exchanges or commodity trading—where the only thing that matters is what you're willing to pay. But many of the most important markets in our lives don't work this way. College admissions, job placements, and even finding romantic partners all require mutual selection: you can't just choose; you must also be chosen. These are matching markets, and they follow different rules than conventional commodity markets. The distinction becomes clear when we examine kidney transplantation. Although there's a severe shortage of kidneys for patients who need them, we don't allow people to buy and sell organs. Instead, economists have designed kidney exchange systems that allow incompatible donor-patient pairs to find matches with other pairs. This innovation has saved thousands of lives without requiring monetary transactions. The market works not by setting prices but by coordinating complex exchanges among willing participants. Markets exist on a spectrum from purely anonymous commodity exchanges to deeply personal matching processes. Even commodity markets require careful design—the Chicago Board of Trade transformed wheat from a product that had to be personally inspected into a standardized commodity that could be traded sight unseen. Meanwhile, matching markets like school choice systems must be designed to elicit honest preferences from participants while ensuring fair outcomes. Market design represents a radical shift in economic thinking: from merely observing and predicting market behavior to actively engineering better markets. This approach combines theoretical insights with practical solutions, much like how civil engineers use physics to build bridges. By understanding the underlying principles that make markets work—or fail—economists can now design institutions that better serve human needs.

Chapter 2: Three Core Problems: Thickness, Congestion, and Safety

For a market to function effectively, it must first achieve "thickness"—bringing together enough participants to create meaningful choices. A marketplace with only a few buyers and sellers offers limited options and often fails to create good matches. Dating websites work because they attract many potential partners; medical residency matching programs work because they include thousands of doctors and hospitals. Market designers therefore focus first on creating thickness by establishing centralized clearinghouses or platforms that aggregate participants. However, thickness alone creates a secondary problem: congestion. When too many potential transactions must be evaluated in limited time, participants cannot properly consider their options. This explains why college application deadlines are staggered, why restaurants use reservations, and why financial markets have evolved complex systems to process millions of trades. The New York City high school matching system once left 30,000 students unassigned because there wasn't enough time to process all applications, revealing how congestion can paralyze even thick markets. The third critical challenge is safety. Participants must feel secure revealing their true preferences and information without fear of being exploited. In Boston's old school assignment system, parents faced a strategic nightmare: listing their true favorite school could actually harm their child's chances of getting into any decent school. The system rewarded strategic manipulation rather than honesty. Similar problems arise in job markets where candidates fear revealing their true salary requirements or employers hold back information about working conditions. These three challenges—thickness, congestion, and safety—interact in complex ways. A market that solves one problem often exacerbates another. For instance, online dating platforms create thickness by attracting many users, but this generates congestion as attractive profiles receive hundreds of messages. Some platforms address this by limiting the number of messages users can send, forcing them to be selective about whom they contact. Market designers must carefully balance these competing demands. The medical residency match tackles all three problems: it creates thickness by including virtually all new doctors and teaching hospitals; it manages congestion by having participants submit preferences in advance; and it ensures safety by using an algorithm that makes honesty the best strategy. The remarkable success of this system demonstrates how thoughtfully designed markets can transform chaotic, inefficient processes into orderly, beneficial exchanges.

Chapter 3: Matching Markets: When Price Isn't the Only Factor

Matching markets fundamentally differ from conventional markets because price alone cannot determine who gets what. When you apply to college, interview for jobs, or look for a romantic partner, both sides must choose each other. These are two-sided matching markets where mutual selection is required. Unlike buying a television where your money is all that matters, in matching markets your specific characteristics and preferences—and those of the other party—determine outcomes. This mutual selection process creates complexity absent from commodity transactions. Medical residency programs don't simply hire the doctors willing to work for the lowest wages; they seek candidates with particular skills and characteristics. Similarly, doctors don't choose residencies based solely on salary; they consider location, prestige, training quality, and specialization. The matching process must account for these multidimensional preferences on both sides to create successful pairings. Matching markets also differ in how they handle scarcity. When apartments are scarce, landlords can simply raise rents until supply meets demand. But top universities cannot and do not raise tuition until only their target number of students can afford to attend. Instead, they maintain relatively accessible tuition while using an application process to select among qualified candidates. This selection process considers factors beyond willingness to pay, including academic achievement, personal qualities, and institutional priorities. The absence of price-clearing mechanisms creates distinctive failure modes in matching markets. One common problem is "unraveling," where participants try to secure matches earlier and earlier to beat competitors. This happened in the medical residency market, where hospitals once hired students two years before graduation—before anyone could tell who would make good doctors. Similarly, elite law firms sometimes make offers to students after just one year of law school, leading to poor matches as students' interests and abilities change. Another failure occurs when markets become thin because participants avoid revealing preferences. In some European university admissions systems, students can apply to only one program, meaning they must make a high-stakes decision about where to apply without knowing their chances. This limitation prevents students from expressing their full range of preferences, resulting in missed opportunities for better matches. Well-designed matching markets solve this problem by allowing participants to safely express multiple preferences without penalty.

Chapter 4: Market Failures: Timing, Information, and Strategic Behavior

Market failures in matching systems often stem from problematic timing mechanisms. When transactions occur too early, decisions must be made before crucial information becomes available. The college football bowl selection process historically suffered from this problem, with teams chosen for prestigious games before their regular seasons ended. Sometimes these early selections backfired spectacularly, as when Notre Dame was selected for the Orange Bowl in 1990 but subsequently lost games and finished ranked fifth nationally. This kind of premature matching wastes opportunities to create better matches based on complete information. Conversely, some markets move too quickly rather than too early. High-frequency trading in financial markets has created an arms race where milliseconds matter, with firms spending billions on faster communication channels between New York and Chicago. This speed-based competition diverts resources from productive investments to a socially wasteful contest for tiny timing advantages. Market designers have proposed solutions like batch auctions held once per second, which would shift competition back to price rather than speed. This illustrates how changing market rules can transform destructive competition into beneficial coordination. Strategic behavior creates another class of market failures. When participants must make decisions about revealing preferences or information, they face incentives to misrepresent their true desires. In Boston's old school assignment system, parents who listed an oversubscribed school as their first choice often lost any chance at their second-choice school, even if they had high priority there. This forced families to engage in complex strategic calculations rather than simply listing schools in order of preference. Similar problems plague housing markets, where buyers may hide their true interest to avoid appearing eager and driving up prices. Information problems also create market failures. The market for used cars famously suffers from asymmetric information: sellers know whether their cars are reliable "peaches" or problematic "lemons," but buyers cannot easily determine quality before purchase. This informational disadvantage leads buyers to offer less than peaches are worth, driving good cars from the market. Similar dynamics appear in hiring markets, where employers struggle to identify truly interested candidates from among hundreds of seemingly identical applications. These failures have substantial costs. When markets unravel, as in judicial clerkship hiring, participants make less informed decisions, producing worse matches. When strategic behavior dominates, as in some school choice systems, sophisticated participants gain advantages over those who don't understand the system's complexities. These problems particularly disadvantage vulnerable populations who lack resources to navigate complex markets, turning economic inefficiency into social inequity.

Chapter 5: Designing Solutions: Clearinghouses and Algorithms

The breakthrough insight of market design is that carefully constructed algorithms and clearinghouses can solve many matching market failures. These systems work by collecting preferences from all participants and then producing matches according to well-defined rules. The deferred acceptance algorithm, developed by mathematicians David Gale and Lloyd Shapley in 1962, became the foundation for many successful market designs. This algorithm produces "stable" matchings where no participant could arrange a better match by circumventing the system. Stability is crucial for voluntary markets because unstable matchings collapse as participants discover better options outside the system. This explains why some British medical residency clearinghouses failed while others succeeded: those producing unstable matchings saw hospitals and doctors abandoning the system to arrange better matches on their own. Stability ensures that participants have no incentive to circumvent the matching system, which maintains market thickness and prevents unraveling. Beyond stability, well-designed clearinghouses solve the congestion problem by processing complex preference information efficiently. New York City's high school match handles applications from over 80,000 students to hundreds of schools, a task that would be impossible through decentralized communications. By having students submit ranked preferences in advance, the system can analyze all possible matches simultaneously, producing better outcomes than the previous system where schools and students exchanged offers sequentially over months. Safety is addressed through incentive compatibility—designing systems where participants benefit from revealing their true preferences. In the Boston school choice system redesign, economists created a process where parents could safely list schools in their genuine order of preference, eliminating the strategic calculations that previously advantaged sophisticated families. This property makes the system more equitable by rewarding honesty rather than strategic sophistication. These designs must adapt to real-world complexities. When couples entered the medical match seeking positions in the same location, the original algorithm could no longer guarantee stable outcomes. Economists Alvin Roth and Elliott Peranson developed a modified algorithm that accommodates couples while maintaining stability in practice, if not in theory. This hybrid approach—combining theoretical insights with practical engineering—characterizes successful market design. Crucially, these systems must reflect community values and constraints. School choice mechanisms incorporate priorities for siblings and neighborhood residents, reflecting community judgments about fairness. Kidney exchange systems respect the legal prohibition on organ sales while maximizing the number of life-saving transplants. These examples demonstrate that market design isn't about imposing market solutions on every domain, but rather about applying market principles where appropriate while respecting ethical and legal boundaries.

Chapter 6: Case Studies: School Choice, Medical Residencies, and Kidney Exchange

School choice reforms in Boston and New York City demonstrate how theoretical insights translate into practical improvements. Boston's old "immediate acceptance" system forced parents to make strategic gambles: listing a popular school first could mean losing any chance at second-choice schools. When economists redesigned the system using deferred acceptance principles, families could finally list schools in their true order of preference. One Boston parent explained the profound relief: "We no longer have to choose between making our first choice our first choice and getting a school." The new system particularly helped disadvantaged families who previously lacked the resources to navigate the strategic complexities. The medical residency matching program represents market design's longest-running success. Since 1952, this clearinghouse has matched new doctors with hospital training positions, evolving to address changing needs. When women entered medicine in greater numbers, the matching algorithm was modified to accommodate couples seeking positions in the same location. This adaptation preserved the core benefits of centralized matching while addressing new constraints. Today, this system efficiently matches over 30,000 physicians annually, with high satisfaction rates among both doctors and hospitals. Kidney exchange represents perhaps the most dramatic life-saving application of market design. With over 100,000 Americans waiting for kidney transplants but only about 17,000 transplants performed annually, innovative exchange mechanisms significantly expand the donor pool. Economists designed algorithms that identify complex chains of compatible donor-patient pairs, allowing for exchanges among incompatible pairs. Non-directed donors (those willing to donate to anyone) can now trigger transplant chains benefiting multiple recipients. These systems have facilitated thousands of transplants that otherwise would have been impossible. Each case illustrates how theoretical principles adapt to practical realities. The kidney exchange system initially envisioned complex simultaneous exchanges, but surgeons pointed out the logistical impossibility of coordinating eight simultaneous surgeries. Market designers responded by developing non-simultaneous chains, which expanded the scope of possible exchanges while maintaining necessary safeguards. Similarly, school choice mechanisms incorporate community priorities for siblings and neighborhood residents while preserving the core benefits of strategy-proof matching. These successes reflect an essential characteristic of effective market design: the willingness to combine theoretical rigor with practical flexibility. The best designs emerge through collaboration between economists, domain experts, and system participants. School choice reforms required input from school administrators, parents, and community representatives. Kidney exchange systems developed through partnerships between economists, transplant surgeons, and patient advocates. This collaborative approach ensures that market designs address real-world constraints while achieving their theoretical potential.

Chapter 7: Ethical Boundaries: Repugnant Transactions and Market Limitations

Not everything should be exchanged through markets. Certain transactions—labeled "repugnant" by economists—face opposition even when willing participants exist on both sides. This repugnance varies across cultures and changes over time: charging interest on loans was once forbidden by Christian and Islamic teachings; today Islamic finance still prohibits interest while finding alternative structures for loans. Similarly, indentured servitude was once common but is now universally banned, while same-sex marriage has transformed from prohibited to protected in many societies within a generation. Market designers must recognize these moral boundaries rather than dismissing them as irrational constraints. The prohibition on selling kidneys for transplantation illustrates this complexity. While economists can demonstrate that allowing kidney sales would likely save lives by increasing the organ supply, many people object that monetizing organs would diminish human dignity, exploit the poor, or create a slippery slope toward commercializing other aspects of human life. These concerns cannot be dismissed simply because they don't fit neatly into utilitarian calculations. Rather than fighting against repugnance, innovative market design works within ethical constraints to achieve desirable outcomes. Kidney exchange systems respect the prohibition on organ sales while still expanding transplant opportunities through in-kind exchanges. This approach acknowledges moral boundaries while seeking to save lives. Similarly, financial markets are structured to prohibit insider trading while still allowing efficient price discovery through legitimate transactions. These examples show how market design can accommodate ethical limitations while preserving core economic benefits. The question of which transactions should be permitted evolves through democratic processes, not economic analysis alone. When California voters banned horsemeat consumption or when various jurisdictions legalize marijuana, they express collective judgments about permissible exchanges. Market designers must respect these democratic determinations while helping design systems that achieve societal goals within established constraints. This approach recognizes that markets are human institutions serving human purposes, not natural phenomena with inevitable structures. Market design also requires recognizing when markets alone cannot solve problems. School choice mechanisms cannot create more good schools; they can only allocate existing spots more efficiently. Kidney exchange systems save lives but cannot fully meet transplant needs without addressing underlying causes of kidney disease. This humility about market limitations distinguishes thoughtful market design from market fundamentalism. The goal is not to subject everything to market forces, but to harness market mechanisms where appropriate while recognizing their boundaries.

Summary

Market design reveals that the fundamental economic question—who gets what and why—is not simply about prices but about the underlying rules and structures that determine how we find and choose each other. By examining how matching markets succeed or fail, economists have transformed economics from a purely descriptive science into a form of social engineering that improves real-world outcomes. The insights developed through studying kidney exchanges, school choice systems, and medical residency matching demonstrate that markets are human artifacts that can be improved through thoughtful design. The principles that emerge from this work transcend specific applications. Successful markets need thickness (many participants), uncongested interaction (enough time to consider options), and safety (making honesty the best strategy). These qualities don't emerge automatically but require careful design that reflects both theoretical insights and practical constraints. The greatest achievement of market design may be its demonstration that economics can combine mathematical rigor with humanistic concern for fairness, equity, and social welfare. By designing markets that work better for everyone, economists have found a way to advance both efficiency and justice, showing that these values need not conflict when institutions are thoughtfully constructed.

About Author

Loading...

Alvin E. Roth

Read more