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Who gets what and why: Understand the choices you have, improve the choices you make by Alvin Roth

19/06/2016

 The book basically covers Roth’s work, which earned him a nobel prize, in helping design market exchanges – in particular kidney donor exchange but also improving the design of school choice systems to ensure better matches between a desired school and the school someone can get into.

Markets often emerge, whether they are consciously planned or not, and their spontaneity is a good reason why we should be careful in the way we want to direct or control them. However, Roth argues, this is not a reason to never intervene but it is important to recognise where we might intervene in a clever way to improve the operation of markets.

Matching markets are those where participants must not only choose but also be chosen. If a pint of beer costs $6 at my local pub, the publican is likely indifferent between my $6 and that of any other patron. However, as Roth points out, you can’t just offer the lowest salary cost to google to get a job there or offer to pay the highest tuition to an elite university, you also have to be chosen.

Google and the elite university do discriminate between one offer and another unlike our hypothetical local publican.

Roth’s desire in working on matching markets is to make markets “thick” (lots of participants) rather than “thin” (few participants) because of the increased chance of a successful match.

Much of the book discusses factors which prevent a market from being “thick” and, I thought, an interesting example of this was when Roth, towards the end of the book, discusses the idea of how “repugnance” can constrain markets.

Roth says “repugnant” transactions are those “that some people want to engage in and that are objected to by people who may not themselves experience any direct harm”.

Many examples readily come to hand. The consumption of marijuana by an individual does not have a material affect on anyone external to the transaction but many people want to bar this transaction for myriad reasons.

 Prohibition of alcohol in the United States, which is cited by Roth as an example of a once “repugnant” market, came about because the consumption of alcohol was considered to result in disastrous social consequences and therefore was too repugnant to be permitted.

Banning the legal market for alcohol, of course, did not stem the flow of it and the flow-on consequences – such as the rise of organised crime in the US – were worse than any harmful social consequences a legalised market for alcohol  brought with it.

 It has now been pretty widely recognised that prohibition caused more problems than it solved and this market is no longer considered so “repugnant” that it should be prohibited. Yet prohibition, notably in the sale of drugs, persists elsewhere.

Changes in attitude towards particular markets often reflect changed social mores around the repugnance of those markets. While alcohol is recognised as having “spill over” effects, it is no longer regarded, in the mainstream at least, as so repugnant as to justify its prohibition.

There are also distinct cultural differences which are pertinent to the discussion. A personal anecdote may clarify this point. Several years ago, while living in South Korea, I went to a restaurant where I was offered dog meat. My mother has a small pet dog and for whatever reason the prospect of eating dog made me slightly squeamish. I understand selling dog meat for human consumption is not illegal in New Zealand but many westerners, such as myself, may balk at eating the meat. However, there are many products, cigarettes or canned tuna for example, which I do not wish to consume but would not wish to prohibit others from enjoying.

 Others, as Roth explains by noting it is illegal in California to sell horse meat for human consumption, feel differently.

 Repugnance is subjective.

Understanding why people regard certain markets as repugnant is important to understanding why people want to limit markets which don’t bear a direct cost on parties external to the transaction.

 PS:

Roth fleshed out the idea of “Repugnance as a constraint on markets” in an academic paper by that name in 2007.

Econtalk podcast with Alvin Roth.

 

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