Monday, 7 November 2016

Book review: Who Gets What - and Why

Alvin Roth won the Nobel Prize in Economics in 2012 (along with Lloyd Shapley) "for the theory of stable allocations and the practice of market design". So, I was glad to finally have time to read Roth's 2015 book, "Who Gets What - and Why". I wasn't sure what to expect from this book, having previously only read some of Roth's work on kidney exchange, and was pleasantly surprised that the book covers a lot of fundamental work on the design of markets.

In introductory economics, we usually start by focusing on commodity markets - markets where the goods that are being offered for sale are homogeneous (all the same). In commodity markets, the decision about 'who gets what' is entirely determined by price - the consumers that value the good the most will be buyers, and the producers with the lowest costs will be sellers. This book (and indeed, much of Roth's most high-profile research) focuses instead on matching markets - markets where price cannot perform the role of matchmaker by itself. As Roth notes early on in the book:
Matching is economist-speak for how we get the many things we choose in life that also must choose us. You can't just inform Yale University that you're enrolling or Google that you're showing up for work. You also have to be admitted or hired. Neither can Yale of Google dictate who will come to them, any more than one spouse can simply choose another: each also has to be chosen.
The book has many examples, but I especially liked this example of the market for wheat, and how it became commodified:
Every field of wheat can be a little different. For that reason, wheat used to be sold "by sample" - that is, buyers would take a sample of the wheat and evaluate it before making an offer to buy. It was a cumbersome process, and it often involved buyers and sellers who had successfully transacted in the past maintaining a relationship with one another. Price alone didn't clear the market, and participants cared whom they were dealing with; it was at least in part a matching market.
Enter the Chicago Board of Trade, founded in 1848 and sitting at the terminus of all those boxcars full of grain arriving in Chicago from the farms of the Great Plains.
The Chicago Board of Trade made wheat into a commodity by classifying it on the basis of its quality (number 1 being the best) and type (winter or spring, hard or soft, red or white). This mean that the railroads could mix wheat of the same grade and type instead of keeping farmer's crop segregated during shipping. It also meant that over time, buyers would learn to rely on the grading system and buy their wheat without having to inspect it first and to know whom they were buying it from.
So where once there was a matching markets in which each buyer had to know the farmer and sample his crop, today there are commodity markets in wheat...
Of course not all markets can easily be commodified, which means that many markets remain matching markets. And in a matching market, the design of the market is critical. The book presents many examples of matching markets, from financial markets, to matching graduate doctors to hospitals, to kidney exchange. Roth also discusses signalling, a favourite topic of mine to teach, and which is of course important in ensuring that there are high-quality matches in markets.

On kidney exchange, it is interesting to read an economist who isn't substantially pro-market (e.g. kidneys for transplant should be traded in markets, at market prices). Roth recognises that there may be valid objections against fully monetising some markets (such as kidney exchange). He writes (the emphases are his):
Such concerns about the monetization of transactions seem to fall into three principal classes.
Once concern is objectification, the fear that the act of putting a price on certain things - and then buying or selling them - might move them into a class of impersonal objects to which they should not belong. That is, they risk losing their moral value.
Another fear is coercion, that substantial monetary payments might prove coercive - "an offer you can't refuse" - and leave poor people open to exploitation, from which they deserve protection.
A more complex concern is that allowing things such as kidneys to be bought and paid for might start us on a slippery slope toward a less sympathetic society than we would like to live in. The concern, often not clearly articulated, is that monetizing certain transactions might not itself be objectionable but could ultimately cause other changes that we would regret.
Overall, the book is a really good complement to learning about the commodity markets that we look most closely at in introductory economics. Many economists (myself included) probably don't spend nearly enough time considering the design of markets and largely take the role of prices in allocating resources as a given. This is definitely a highly recommended read.

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