Counterparties: Economists who did good

October 15, 2012

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Lloyd Shapley and Alvin Roth have won the Nobel Prize in economics “for the theory of stable allocations and the practice of market design”. To put it differently, they won the Nobel for their work on “matching markets” through investigations into marriage, or dwarf tossing, or illegal horse meat.

Alex Tabarrok of Marginal Revolution drills down into exactly why matching markets matter to our everyday lives: “Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients.”

As Josh Gans explains in the best post on Shapley and Roth’s work, those are markets defined by their lack of prices. Shapley, a professor emeritus in the economics department at UCLA, is best known for creating, along with D. Gale Johnson, the Gale-Shapley algorithm that creates “stable allocations when two groups of people are to be matched with one another”.

This matching has big impact in the real world: Roth, a Harvard professor who is recently accepted a new position at Stanford, is most heralded for his development and implementation of Shapley’s theory in kidney donation waiting list policies. Roth’s key insight was figure out a practical way of expanding matching beyond pairs. Here’s Tabarrok again:

Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.

But why stop at three? What about an n-way swap?

Catherine Rampell writes in the NYT the answer to this question is also the basis for an algorithm used by “New York, Boston, Chicago and Denver to… help assign students to schools”. This Forbes profile, and other great background on both Shapley and Roth (who blogs here), has been culled by Tyler Cowen and Tabarrok at Marginal Revolution. As you read though the quotes of adulation for both men from economists assembled by Mark Thoma, it’s hard to miss the pride they take in work with such clear social benefits. Steven Levitt offers this compliment: “When I talk about economists, one of the greatest compliments I give is to say that they changed the way people think about the world”. — Ben Walsh

Sprint announces deal to sell 70% itself to Softbank for $20.1 billion – Dealbook

Good Questions
Will central banks cancel government debt? – Gavyn Davies

The thin line between makers and takers – Tyler Cowen

Billionaire Whimsy
“If a man is not an oligarch, something is not right with him” – Chrystia Freeland

The buyback epidemic: Why corporate America is squandering its resources – Josh Brown
Get ready for the dividend cliff – WSJ

The joys of refinancing, where “everyday is Groundhog Day” – Chris Taylor
A detailed case against worrying about the housing market – Calculated Risk
A bubble we can use: mortgage refinancing – Ben Walsh

Tax Arcana
From lattes to losses: How Starbucks avoids UK taxes – Reuters

The Fed
On second thought, we should have done more to help the economy, Fed’s Dudley says – Binyamin Appelbaum

Under Armour CEO: worrying about the fiscal cliff is “loser talk” – Business Insider

Old Normal
Ag bailouts, industrialization, and the rise of finance: Downton Abbey’s economics – Somewhat Logically

Crisis Retro
Up for bidding at $4.99: “Lehman Brothers fancy paper napkin” – eBay

You can support Keynesianism without supporting big government – Stumbling and Mumbling

Pizza Hut decides it shouldn’t bribe someone to ask a pizza-related question during the presidential debates – AP

Rupert Murdoch calls phone hacking victims “scumbag campaigners” – Guardian


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