What Have We Learned from Market Design?

Abstract

In the centennial issue of the Economic Journal, I wrote (about game theory) that the real test of our success will be not merely how well we understand thegeneral principles that govern economic interactions, but how well we can bring this knowledge to bear on practical questions of microeco-nomic engineering..." (Roth, 1991) Since then, economists have gained significant experience in practical market design. One thing we learned from this experience is that transactions and institutions matter at a level of detail that economists have not often had to deal with, and, in this respect, all markets are different. But there are also general lessons. This essay will consider some ways in which markets succeed and fail by looking at some common patterns we see of market failures, and how they have been fixed. This is a big subject, and I will only scratch the surface by concentrating on markets my colleagues and I helped design in the last few years. My focus will be different than in Roth (2002), where I discussed some lessons learned in the 1990s. The relevant parts of that discussion, which I'll review briefly in the next section, gathered evidence from a variety of labor market clearinghouses to determine properties of successful clearinghouses, motivated by the redesign of the clearing-house for new American doctors. 1 Other big market design lessons from the 1990s concern the design of auctions for the sale of radio spectrum and electricity. 2 As we have dealt with more market failures, it has become clear that the histories of the American and British markets for new doctors, and the market failures that led to their reorganization into clearinghouses, are far from unique. Other markets have failed for similar reasons, and some have been fixed in similar ways. I'll discuss common market failures we have seen in recent work on more senior