Who Gets What: The New Economics of Matchmaking and Market Design
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Who Gets What: The New Economics of Matchmaking and Market Design


[MUSIC] I’m delighted this evening to have
the privilege of introducing this evening’s speaker, Al Roth. Al is the inaugural Craig and Susan McCool professor of
economics at Stanford. Al arrived here just in time
to win the Nobel Prize. Which we’re very pleased about. Not just because he won the prize but
because he did it here.>>[LAUGH]
>>This was more like a homecoming for Al since he received Masters and
Doctors degrees in Operations Research at
Stanford in 1973 and 74. Before Stanford, he was
the George Gund Professor of Economics and Business Administration at Harvard. And before that, he was the Andrew Mellon Professor of
Economics at the University of Pittsburgh. We are so excited to have Al with us. He is an expert in market design, and not
just in the theory of market design but in putting that into practice and
things as he’ll tell you, like school systems and
kidney transplants and so on. It’s a privilege and
honor Al to have you with us. So please join me in giving
a warm JSB welcome to Al Roth.>>[APPLAUSE]
>>Thanks.>>[INAUDIBLE]
>>[APPLAUSE]>>So, it’s good to be here. I guess, I heard from the reactions
to the Deans calling out the years, I have some idea of how many of you
are here from 2012 and from 1998. And welcome back. I also returned this year. As I mentioned, I got my PhD in 1974,
my advisor was Bob Wilson. How many of you had a class
with Bob when he was here? Well, I hope you appreciated it. He started market design,
he’s one of the giants in that field. And I’m going to tell you what’s
happened to it since then because it’s grown quite a bit since it’s
beginnings here at Stanford. So what market designers do
is think about, what market. It might better be called
market place design. We think about what markets
doing what market places have to accomplish in order
to make markets work well. And so, what I want to do today,
in just tongue twist is to think a little bit about what market places are because
you are out in the market now. But markets are a lot of different
things and I want to spend the time together tonight talking about
how markets work and how they fail. And how we can fix them
when they’re broken. And how markets may be a more comprehensive class of institutions than
you’re accustomed to thinking about. And so
I’ll tell you a little about my work, and I’ll focus on the parts that are least
like the market you are familiar with. And so let me start by asking,
what’s the role of money in markets? So here’s a food market and
the New York Stock Exchange. And mostly when we think about markets,
we thing about commodity markets. And in commodity markets,
the role of money is huge. Thus supply and
demand decide who gets what, so the thing about commodity markets is if
you are making small enough trades in a big enough market,
you don’t particularly care. You don’t have to care
who you’re dealing with. When you buy 100 shares of AT&T
on the New York Stock Exchange, you don’t have to fill
out any application form. You don’t care who the seller is, you’re
not worried about whether he’s taking good care of those shares while he
had them, and he’s not going to worry about whether you’ll take good
care of them while you have them. This is an arms length
anonymous transaction, and the job of the New York Stock Exchange
is price discovery. It’s to find the price at which
supply will equal demand, and that’s the price at which you’ll transact. But in many markets prices
don’t do all the work. And you’re all familiar
with these markets, although we don’t always
think of them that way. For instance, Stanford doesn’t fill
its MBA class by raising tuition until just enough people are ready
to come to Stanford, right? Stanford is expensive to go to, but it’s cheap enough that lots
of people would like to come. And so Stanford said to tuition,
get’s lots of applicants and then chooses which ones can come. So the price doesn’t decide
who gets into Stanford, okay? The labor markets are like that too. When you go out on the job market, it may
sometimes seem as if your company lowers the wage until just enough people
remain who want to do the work. But that’s probably not
the way they do that in most of the companies that you work for. So instead,
they get lots of applications and they have to choose who
to make the offer to. And of course just as Stanford
can’t choose who comes, firms can’t chose either. You can’t choose to go there, but
they can’t choose that you come there. They have to compete with
the other offers you’re getting. Stanford has to compete with Harvard. So, matching markets are the markets in
which you can’t just choose what you want, even if you can afford it. You also have to be chosen, right? You can’t just decide to come to Stanford. You have to be admitted. You can’t just decide to show up for
work at Google, you have to be hired. But Stanford can’t just decide
that you’ll come either, and Google can’t decide that you’ll come. So these are matching
markets that have courtship. They’re a lot like marriage, right? You can’t just choose your spouse,
you also have to be chosen. And a lot of the marketplace institutions
are about that courtship there. Applications and admissions,
and selections, and visiting days, and recruitment. So I’ve been involved with my colleagues
in a bunch of matching markets. And some of them use money, and
some of them don’t use money at all. And I’ll focus today on
some of the stranger ones, on one of the stranger ones that doesn’t. But even the ones that use money,
the labor markets, for instance, that isn’t what
decides who gets what. So the thing about matching markets
is just about every market that isn’t a commodity market
is a matching market. You care about who
you’re transacting with. And the price, therefore, isn’t the only thing that decides
what happens in the market. So my colleagues and I have designed a lot
of labor market clearing houses, for instance. If you have friends who are doctors, they go through an unusual job market when
they graduate from medical school called the National Resident Matching Program and
that’s something that I go to design. We’ve made some innovations for
new PhD economist recently. That’s one that’s close to home. Those are both markets where
of course money is used. Everyone who is a doctor or
is a Professor of Economics gets paid. But it’s not the pay that decides
who’s a professor at Stanford or who’s a Doctor at Stanford Hospitals. Now there are other matching markets,
where we don’t use money at all because we don’t think it would be
an appropriate thing to do. So school choice systems for who goes
to which public schools, all right? We think as a society, we think we have an obligation to
provide education to our children. And public school is mandatory and
public school is free. But there’s still our issues of choice,
who goes to which school. And my colleagues and I have gotten to
design choice systems for New York City high schools and for Boston public schools
and recently in Denver and New Orleans. And just last week we hosted a conference
of many different school districts here to talk about these things. And so
I imagine that some of the technology, some of the kinds of things that I’ll tell
you a little bit about, when I talk about kidney exchange are going to diffuse into
more American cities, maybe one near you. But what I’m going to you about
mostly today is kidney exchange. Kidney exchange is a market
where no money is used. But after I tell you about it, I hope you’ll see why I think of
it as being clearly a marketplace. And so that’s really
the subtext of my talk today, is how things that you might not think
of as markets act like marketplaces. And we should think of them as markets. And again, many, many of the most
important markets are matching markets. So before I go on to
tell you about kidneys, think about all the matching
that you have all gone through. At some point you got into schools at
various levels, you got into college. These are things that cost
a lot of money sometimes but the money doesn’t
determine who goes where. Then you’re all graduates of Stanford. You’ve all gotten jobs. Some of you have created your own jobs. But some of you have gotten
jobs with existing firms. Many of you have,
those are matching markets. Many of you are married. Some of you who aren’t married or are going to be married
sometime in the future. You’re engaged in a kind of marriage
market where you can’t just choose what you want, you also have to be chosen. And I’m going to talk to you about some
aspects of medical care where you can’t just choose what you want,
but also have to be chosen. In particular, I’m going to talk
about organ transplantation. So this is a good example of
the allocation of scarce resources, so it’s a natural topic for economists but
it’s without the use of money because in most of the West we have laws
against buying organs for transplantation. And it’s a big part of the economy,
although you can’t buy a kidney, the care of patients with end stage
renal disease with Kidney disease is a multi-billion dollar industry. So, this is an industry
with lots of interest. It’s not insignificant part
of health care expenditures; it’s the biggest single
program in Medicare. So, many billions of
dollars are spent on this. And, the unusual thing about
transplantation is that it is not only the treatment of choice,
it is not only the best treatment, it is also the cheapest. So dialysis is very expensive it costs
Medicare about $85,000 a year to keep someone on dialysis, but it only costs
$120,000 for someone to get a transplant after which they need immunosuppressive
drugs that cost about $20,000 a year. And they get up and go back to work and something that when they are on
dialysis after a while they can’t do. So, this is not an insignificant
part of the economy. It’s a part of the economy that
has very scarce resources. I’ll tell you how we try to get more
transplants in a marketplace that plays out without any money. Although there’s important
money in the background. So what’s the story with kidney exchange? So many more people need kidneys
than there are organs available. So there are 95,000 people on
the deceased donor waiting list at the moment in the United States. They’re waiting for
an organ from a deceased donor. So when you signed up for
a California driver’s license, when you were here, if you did that, you had an opportunity to register on
the California organ donor registry. That’s where deceased donors
mostly come from, that registry. So the waiting list has 100,000 people. That means you might have to wait a long
time because we only have about 11,000 deceased donors in
the United States a year. 11,000 deceased donor transplants,
that’s only about 6,000 deceased donors. But deceased donors aren’t
the only source of transplants. You each have two kidneys, and if you’re
as healthy as I hope you are then if you knew someone who had kidney
disease you can give them a kidney. because if you’re healthy,
you can remain healthy with one kidney. So you might be healthy enough to
give someone you love a kidney, but the might still not be able to take your
kidney, and that’s why the possibility of exchange comes in which of course is
a natural subject for economists to study. So the idea of exchange is you
want to give a kidney to someone, in this case supposing you’re donor 1, but your potential recipient has
a different blood type than you do. So blood type A and blood type B. So you’d like to give recipient
1 a kidney but you can’t, she’s got a different
blood type than you do. And donor 2 and
recipient 2 are in the opposite situation. So an exchange is possible where donor
1 the blood type A donor gives a kidney recipient 2 the blood type A recipient. Everyone gets a compatible kidney. This kind of thing happens for other
reasons than blood typing compatibility. Turns out the chance that one of you could
take my kidney is a little over 50%. The chance that my wife can take my kidney
is only about 30% and that’s because my wife and I are parents and in the course
of childbirth, my wife’s immune system might have been exposed to some of the
proteins that our boys inherit from me. And if so, she might have antibodies to
those proteins that would be ready to attack my kidney if it should show up. So there are other kinds incompatibilities
than just blood type incompatibility. And someone who’s been sick for
a long time or who’s had a previous kidney transplant will have lots of
antibodies to human proteins and they’ll be hard to match, whereas
other people will be easy to match. I just came back from Korea,
which is a place actually, where kidney exchange has been
going on for some time and the issue there is in Korea,
but not in the United States. Blood types A and
B are equally frequent, so this kind of simple exchange
can go on quite easily there. Okay, now notice that no money
changed hands in that exchange. And one, there are many reasons for
that, but one reason is it’s against the law, okay? So here’s a sentence from the 1984
National Organ Transplant Act that says, it shall be unlawful for
any person to knowingly acquire it, etc, any human organ for valuable consideration
for use in human transplantation. So you might worry that, that’s going
to rule out kidney exchange, too. That sure looks like valuable
considerations going on there. A kidney’s being exchanged for a kidney. And if you get very
philosophical about this but eventually we got an amendment to the note
that simply said the preceding sentence, that one,
doesn’t apply to kidney exchange. I learned something about federal
legislation while this was going on. There was no opposition to this. No one opposes kidney exchange, but it still took three Congresses
before this bill passed. And it didn’t pass until Charlie Norwood,
the representative from Georgia who’s name is on the bill now, died of
a immunosuppressive related disease. He had a transplant and you take
immunosuppressant drugs forever after, so you’re vulnerable to
some kind of diseases. So it went down just out of
neglect in two Congresses. In the third Congress, Charlie Norwood died and his colleagues
named the bill after him and passed it. It passed by a claim with no dissent, so legislation there are some
frictions out there in the world. Okay, so let me tell you
about some other frictions, about the actual frictions
in running an exchange. So here’s a picture of an exchange,
I’m the man in the yellow gown. You can tell that I’m keeping my hands out
of the way so no one hands me or anything. And-
>>[LAUGH]>>And what I would like to not be handed is in this bucket here,
there’s a kidney in there. And behind me, not in this picture but behind me in this picture off
screen is another operating room. And the kidney has just been removed,
just steps away and carried over into this operating room where it’s being
transplanted into this patient. And this is all happening in Cincinnati,
Ohio. And at the same time in Toledo,
Ohio the donor, her patient and his, the transplant recipient, his donor
are doing the same thing in Toledo, Ohio. And when I say at the same time, I mean
literally at the same time because you can’t write a contract on a kidney because
no valuable consideration can be given for a kidney. So what they do in this kind of exchange
is they They prep the patients, they anesthetize them,
they make the initial incisions. Then they get on their cell phones, and they say we’re ready to go here in
Cincinnati, are you ready in Toledo? And when they’re told that everything went
smoothly in the preparations in Toledo, then they go ahead and they take the
kidney and everything proceeds from there. So this kind of simultaneous
exchange requires for surgeries, at the same time,
two nephrectomies, taking the kidney out, and two transplants,
putting the kidney in. That means it takes a lot of
resources to do this simple exchange. You need four operating rooms and
four surgical teams to do it. So even the simplest
two-way exchange is hard. It involves a lot of resources. And we’d like to do other kinds of
exchanges because if you’re restricted to two-way exchanges, you don’t get as
many transplants as you could otherwise. This way, we get two transplants that
wouldn’t otherwise have happened. So that’s great, two live donor organs
are donated to patients who need them. But sometimes,
you can’t find two-way exchanges. So sometimes you’d like to be
able to do a three-way exchange. For instance, here’s three pairs. Each pair can give a kidney to the patient
in the next pair in a three-way cycle. So that would require six operating
rooms and six surgical teams. And over time,
we’ve become able to do that. We can assemble those logistics,
but that’s about our limit. And every now and then,
a larger exchange gets done. But the logistics of getting everybody in
place simultaneously to do a three-way exchange is about all we can manage. And it`s still not enough. So the question is,
what can you do in this marketplace that we’re creating to facilitate
exchange where exchanges are hard? Large exchanges are hard because
of a simultaneity requirement. Well, it turns out, so here’s a picture,
where, think of each circle as being typically a pair, a patient donor pair,
and an arrow goes from one circle to another if a kidney from that pair can
go to the patient in the other pair. Okay, so you see that there’s a three-way
exchange is possible here and a two-way exchange. There’s also a non-directed donor. So this is a donor who doesn’t
have a particular patient in mind. And we can sometimes get some chains
going, where he’ll give a kidney to some pair, and the donor in that pair will give
a kidney to a patient in the next pair, and so forth. So let’s think about those
chains a little bit. When non-directed donors first
started to show up, so ten years ago, they were pretty rare. What we used to say to them after,
first of all, they would be any donor gets a thorough
physical exam and psychological exam, make sure they know what they’re doing and
they’re willing. And non-directed donors ten years ago
were treated with a certain suspicion. Sort of the catch-22 of surgery was, if you want to give someone a kidney,
maybe you were unbalanced. But nowadays,
we’ve seen many more of these. Just incidentally,
a big group of non-directed donors, when you look at the non-directed
donors in the United States, a big group of them come from
faith-based organizations. The second big group are policemen and
firemen. They turn out to save people,
and they’re not afraid. But we used to say to them,
is we used to say, well, you have passed through all the screens. You could give a kidney to a person, to a patient on the waiting list, somebody
waiting for a long time for a kidney. A live donor kidney is better
than a deceased donor kidney, you’ll save their life. And that way, you would get an extra
transplant that you wouldn’t otherwise. But now that we have this
pool of patient donor pairs, we can say to non-directed donors,
we can say you could start a chain. You could give a kidney to
a patient who has a donor, who would give a kidney to
another patient who has a donor. And that donor could give to
a patient on the waiting list. So this is a sort of
abstract look at that, this is what it looks like when
you take a picture of the people. And one question is, why are there
only six people in that picture? And the reason that there are only six
people in the picture is we can only muster six operating rooms at a time,
okay? So as long as we’re doing
these chains simultaneously, this is as big as the picture gets. So let’s think again
about this marketplace. Why do we do them simultaneously, and
could we relax that in some circumstances? because if you could do it not
simultaneously, you could use the same surgical teams and the same
operating rooms over at different times. And you could get more
people into the chain. So let’s think about why
we do it simultaneously. So let’s go back to that simple exchange
that I showed you about initially between two pairs. And suppose we always do these
simultaneously, let’s see why. Supposing we didn’t do it simultaneously,
suppose the idea was that on day one, pair donor two would give
a kidney to recipient one. So he doesn’t have a kidney anymore,
he’s successfully given that kidney. And on day two, donor one is supposed
to give a kidney to recipient two, but something goes wrong, and
that link breaks and it doesn’t happen. Well, that’s a tragedy for pair two. They’ve had a surgery
that didn’t help them. They’ve given a kidney and not gotten one,
and they don’t have a kidney anymore. They can’t participate in
kidney exchange next week because they don’t have
a kidney to exchange. So they’ve been tragically harmed,
so we never do that. We always do that simultaneously. But now suppose a living
non-directed donor shows up. And let’s think about doing
that non-simultaneously. So on day one, the non-directed donor
gives to recipient one successfully. And on day two, the donor one
fails to give to recipient two for whatever reason, just same reason
it was here, whatever it was. Well, that’s really disappointing. Recipient two didn’t get a kidney. But it’s not tragic. The pair two,
they haven’t given a kidney yet. They still have a kidney. They can take part in
kidney exchange next week. And they’re no worse off than they were
before the non-directed donor showed up. So they’re disappointed, but
they’re not really harmed. The cost of a broken link is much less. So we can start to explore
whether the benefit of doing things non-simultaneously
might be worth the risk. We’d have to discover how big the risk
is and how big the benefit is. So the first non-simultaneous
exchange we did was in 2007. It was reported in this paper in 2009, and the first author is Mike Rees,
he’s one of the heroes of this story. He’s the kidney surgeon in Toledo, Ohio. There’s a bunch of economists and
computer scientists in here, so it’s an unusual medical paper. And that first non-simultaneous
chain had ten transplants, it had 20 people in the picture. Okay, here’s the better picture, as it showed up in
People Magazine some time later. Okay, so that’s a much bigger picture. So what’s going on there? Here’s a market place that we’ve now
opened up a new kind of exchange, and we’re starting to
see more transplants. Well, what’s going on? It turns out that when we
started kidney exchange, and no one knew anything about it, the
patients we got were ordinary sick people, ordinary people with kidney disease. And some of them were pretty
easy to match to each other, and some of them were hard to match. As in the last ten years, as kidney
exchange has grown in the United States, transplant centers have learned to do it. And they’re now often withholding
their easy to match pairs. So if people come in and
they’re like those two pairs I showed you, often we never see them
in kidney exchange. They just get transplanted
in their hospital. It means that the patients we
are seeing are hard to match. What does it mean to be hard to match? It means you’ve got a lot of antibodies. So there aren’t many kidneys you can take. When we draw those arrows between circles,
there aren’t so many arrows, okay? So here’s a bit of data from
one of our kidney exchanges. And you can see there are these guys
in blue who have a lot of arrows pointing into them. They can take a lot of kidneys,
they’re the low sensitized patients. But there’s lots of people who,
although they are donors can give kidneys to the easy to match patients,
they can’t get kidneys from any people. So this graph’s a little hard to look at. So what I want you to think about is
supposing all those things are sort of strings and you grab the blue,
nodes in your hands and you shake it. You’re going to get a picture
that looks like this jellyfish. And at the top we’ve got
the easy to match pairs, and they’re sort of in a densely
connected part of the graph. Lots of exchanges can go on there. And then there are these
chains hanging down. And it’s those chains that we’re getting
in these long, simultaneous chains. If you got a non-directed donor you can
start at the bottom of one of those chains and just move it right up and
some of those chains can be pretty long. So, here’s a chain that has
sixty people in it, okay? The very first one is an undirected donor
and the others are all hard to match. Patients who, who we couldn’t
take care of in small exchanges. So 60 people in the picture
means 30 transplants. 30 donors and 30 transplants, okay. So that’s basically what we’re seeing now. This is the fastest growing
part of organ transplantation. And it’s exciting to see. But let’s think a little about this. Why don’t we just buy and
sell kidneys, right? There you know, when you talk
to Gary Becker at the University of Chicago he says there’s no shortage
of kidneys, you’ve all got two. You know this room has a huge excess
of kidneys because you only need one. Okay, so I don’t know the answer to, to
why we don’t allow buy and sell kidneys, but it’s certainly something that
economists and business people ought to know more about because, there are lots of
things we don’t allow you to buy and sell. And that reflects the fact that people
have, you know, ordinary people, not economists, not business people, have intuitions about what’s
the proper scope of markets. We probably have some of those
intuitions ourselves and one reason to think about it is because
making markets illegally doesn’t necessarily stop them
from happening right? So there are lots of things
that you can’t buy and sell in the United States and
there are black markets for many of them. Think of illegal drugs for example. So let’s think about this a little bit. And when I started to think about
this I needed a word that would say what I wanted so
I borrowed the word repugnant. When I say a transaction is repugnant
I’m not thinking of it’s simple meaning, that you don’t like it. What I mean is,
I’ll say a transaction is repugnant if some people would like to engage in
it and other people don’t want them to. Okay, so the has been really important, historically, it’s important presently. Here we are in California I think
a prototypical repugnant transaction, the way I am using the term,
is same-sex marriage, right. A repugnant transaction is a transaction
that some people want to engage in and other people don’t want them to. So right now if Rhode Island changes its
law, which I think they are about to. We will have 10 states and the district
of Columbia that allow same-sex marriage. And the rest of the states don’t. And right now California is
one of the ones that don’t. Although for the Supreme Court
they’ve already heard oral arguments is a case that will decide whether same
sex marriage is legal in California. So whether it’s legal or not there are going to be Californians
who want to marry each other. The question is will we allow them to,
to pursue that transaction. Such a repugnant transaction and
the fact that it’s changing and it’s likely to keep changing means that
these repugnities keep changing over time. So think for
instance about interest on loans. There were hundreds of years in Europe
where charging interest on loans was a repugnant transaction. There were people who wanted loans and people who would like to
charge interest on them. But it wasn’t allowed. And that’s changed, and it’s had, of
course, profound effects on the economy. We could hardly have the global
capitalist economy that we have, if we didn’t have a market for capital. So the idea that you
couldn’t have a market for capital had first-order important effects
on how we organize our economic lives. But it’s not the case that as we get more
modern things that used to be repugnant, become less repugnant. It also goes the other way. We live in a country where
there used to be markets for slaves, in the United States. And that’s not a great example because, because it’s not a voluntary
transaction on the part of the slave. But the most common form of the most common way to buy
passage across the Atlantic Ocean during the years after the American
revolution was indentured servitude. There you would be in Ireland or someplace
and you would want to come to Boston. And you didn’t have the fair to pay
the captain to take you across. And so
you would sign articles of indenture. And when he got to Boston he would sell
your labor services Unconditional, you couldn’t quit, for five years,
to the highest bidder. And that’s a form of involuntary servitude
that is entered into, voluntarily. But the 13th Amendment to the Constitution
says we don’t allow that anymore. So there are things that used to
be repugnant, and are not anymore. And there are things that used
to not be repugnant and now are. So these are things worth understanding. I don’t pretend to understand them, but
let me, let’s think about them a little, because I think they are worth
thinking about and fun to think about. Why can’t you eat horse or
dog meat in a restaurant in California? You may not want to eat horse or
dog meat in a restaurant in California, so you might not know that you can’t,
but you can’t. In fact, well I’ll tell you
about the rest of the country, but the short answer is
it’s against the law. Right?
Horse meat may not be offered for sale for human consumption it’s a felony. Dog meat is just a misdemeanor. [LAUGH]
There’s no law in California against eating
grasshoppers or cockroaches. Right, by and large you can’t eat
them in restaurants either and that’s because no one wants to. The reason there’s a law against eating
horse meat is not because no one wants to, it’s because some people want to and
other people don’t want them to. So this was actually passed by
the Class of 1998 when they were here in a referendum. So you guys got to vote on this
if you were California residents. As many people voted for
it It was a referendum. As many people voted for it as voted for Grey Davis who was elected
governor that year. So again, this is something. Because we have a referendum system in
California, there were people who thought that it was a really bad idea that other
people were eating horse meat and that we ought to make a law against it, and
through the magic of referendum they did. Now needless to say, this is something
that varies by time and place. There are lots of places in Europe
where you can eat horse meat. You can eat horse meat
anywhere in the United States, it’s not illegal except in California. But in order to eat meat in
a restaurant in the United States, it has to be inspected and
congress has refused to allow the to provide funds to the US Department of
Agriculture to inspect horse meat. So although it’s not illegal. It’s a crime in California. It’s not a crime in New York, but
no horse meat is available in New York. You’ll have to go to France or Japan. There are lots of places where
they like horse meat, okay. As I have been saying, transactions vary from place to place
whether they are repugnant or not. Let’s think about dwarf tossing. You guys are going to go
out drinking tonight, maybe you’ve thought about
dwarf tossing already.>>[LAUGH]
>>So his you know, in England, it`s legal, and Lenny the giant,
he`s this small man wearing a helmet and he earns his living engaging in
an athletic event in which larger and probably drunker men
>>[LAUGH]>>Throw him for distance and he lands athletically and
rolls and is wearing safety equipment. Here’s the Ontario Dwarf Tossing Ban Act
of 2003.>>[LAUGH]
>>It says in Ontario this is a repugnant transaction, you can’t do it. And it’s not an occupational health and
safety, it doesn’t say Lenny the Giant
should wear a helmet. Lenny the Giant is
already wearing a helmet. It says, no person shall organize a dwarf
tossing event or engage in dwarf tossing. It basically says,
>>[LAUGH]>>Yuck, you know, you shouldn’t do that. Now A French dwarf,
when France banned dwarf tossing. A French dwarf took, who wanted to
continue earning his living this way, so it’s a repugnant transaction. There are people who want to engage in it,
and other people who don’t want them to, and that happened in France too. And the French dwarf took his case before
the UN High Commissioner on Human Rights. And he said that his right to
employment was being denied. And the French case said this is
just sort of yuck, but in French. It said this is an affront
to human dignity. We are all less human when Manuel
Bockenheim earns his living this way. And he had a very moving statement. When I read the case materials, I thought the little guy is going to
win because what he said, is he said, his statement said something like, the
essence of human dignity is having a job. And there aren’t a lot of jobs for
dwarves in France, and this is my job. And I remember thinking but
he didn’t win, France won. The UN committee found for France, basically saying that every
time he earned his living that way each of us became a little less human,
and that we shouldn’t allow it. Even though it was
a voluntary transaction. So repugnant transactions of all sorts,
but it’s hard to tell what they are. It’s hard to tell why horse meat is
repugnant in California and not in France. because again, it’s not the Wild West. That was a 1998 referendum. And it’s not the small size of the dwarfs. Jockeys are small, we don’t mind small guys riding horses and
seeing how fast they can make them go. And there are things that are even closer
to dwarf tossing like wife carrying. So these guys are also athletes. They are not married to each other. Wife carrying is for speed not for distance but-
>>[LAUGH]>>But it’s not dignified, here at the American championship, they
still use the old-fashioned technique. But nowadays most people use the Estonian
position and you know particularly for getting through the water hazards. So there’s a North American Championship
at Sunday River Ski Resort each year near Boston and there’s a world
championship in Finland each year. So I’m not aware of any place in
which wife carrying is repugnant but I have trouble thinking of why,
I’m not sure it shouldn’t be, but I have trouble thinking of a rule
that would say dwarf tossing is and wife carrying isn’t or vice versa. So although I can’t think of general
rules, one thing you notice is that adding money to the mix sometimes
makes things repugnant. Okay, so
something isn’t repugnant by itself, but when you add money to it,
it become repugnant. So interest on loans. Loans weren’t repugnant. People didn’t in medieval Europe think it was a bad thing to lend someone
else money to start a business. To buy stock for
a ship to go on a trading mission. It was charging interest, having your
money earn money that was repugnant. Adoption, adoption is expensive. If you want to adopt a baby it’ll
probably cost a lot of money. But you may not buy the baby
from the birth mother. Okay, there are some parts of
the transaction that you can’t do. Prostitution is illegal in many places,
not in all places. If you look around the world,
then different parts are illegal. Sometimes brokerage is illegal, pimping
is illegal but prostitution is not. But by and large, we’re not,
in most of the world we’re not, against sex,
we’re against payment for sex. Right?
So it’s adding money that makes those transactions repugnant and
sometimes there are transactions that have money that aren’t repugnant but if there’s
too much money it becomes repugnant. And that’s where we think about
laws against price gouging. If you’re, if there’s a blizzard and you want to raise the price on your
snow shovels at your hardware store, you’ll often find yourself in
violation of local law, of state law. And similarly, in Europe right now,
there’s talk about limiting the pay of bankers and, I mean, we have some of
that in the United States as well. With the idea being that,
money is fine, but too much money might make a transaction
that we didn’t approve of. Some of this may impact you guys. These are people, us, especially those
of us who haven’t gone to business and aren’t economists, ordinary people, have
intuitions about economic transactions that often shape what markets we see and
what we don’t. And markets require
lots of social support. So we would be well advised to understand
this intuitions better than we do. Most people can pick the economist out
from his New Yorker cartoon, right? So this poor guy, he’s come to dinner and he didn’t have time to
get a bottle of wine. He’s trying to offer his hosts
some money and that’s, you laugh. You know,
if you invited me to dinner at your house, the surest thing I could
do that would get me never invited again is after dinner say,
you know that was a wonderful dinner. You know that would cost,
you know, $75 in a nice restaurant. Can I just pay you for that? You’d say, this guy doesn’t understand. We’re not a restaurant. We’re not selling food. Inviting him to dinner at our
house is an offer of friendship. And he could invite us
to dinner at his house. He can invite us back. He could bring a nice bottle of wine. He could do a lot of things that
would look like a transaction, but he can’t pay for it. Right, so even those of us
who are very into the economy understand that there are some things that
would be really offensive to offer to pay. Some transactions that can’t be monetized. When you think about why we have laws
against buying and selling kidneys, there are a couple of arguments. One of them,
I’ve sort of classified them here, one of them is just that it is a bad idea. It’s a bad thing. People should never be means and
always should be ends. Many of the Christian churches
adopt that kind of language. Another hardest for economists to understand is they say if
you’re offered too much money, it’s so tempting that you do it against your
better judgment, it’s a form of coercion. I have trouble understanding that,
because, of course If you offered me $10 million
for my house, you could have it. I would just feel like I
had to sell it to you. I would be coerced, but happy.>>[LAUGH]
>>The arguments that I could make the most sense out of, and have the most sympathy with
are the slippery slope arguments. We don’t have much time today so
I’m not going to go into it, but those are arguments that say, if you start with allowing people to
sell their kidneys, you might end up living in a less sympathetic society
than you would like to live in. And I think those have to
be taken very seriously, and we have to think about them. So let me get a sense of the meeting,
test yourself. For repugnance I’m going to ask for
a show of hands. Are you willing to contemplate carefully
regulated sales of live kidneys? Put up your hand if you are. Okay, keep it up because look around. Lots of you, right? MBA reunion.>>[LAUGH]
>>Keep it up, keep it up. How many of you who are willing to
contemplate the sales of live kidneys would be willing to contemplate
the sales of live hearts? Kills the seller.>>[LAUGH]
>>Voluntary, okay? So my point is Lots of us have
our hands up for kidneys, which means maybe that we feel less of
this repugnance than the general public. But many of you, not all of you until I bullied you,
start to pull your hands down for hearts. Which means we all have places that we’re
at least willing to understand The idea that some transactions might be repugnant
even if they were willingly entered into. And therefore, it behooves us to try
to understand where other people draw those lines, even when they draw
them in different places than we do. Right, so you may think kidney
sales would be a good idea, but in order to have this kind of discussion
we’re going to have to seriously engage with people who think that kidney
sales would be a terrible idea. A bad idea, the kind of bad
idea that only bad people have. Okay and I meet lots of those people.>>[LAUGH]
>>So kidney exchange achieves some of the benefits of a market without
running into this barrier of repugnance. So the thing we’ve achieved with
kidneys as far as market design is we’re very pragmatic. We say you can’t sell kidneys, we can
debate that till the cows come home but in the meantime what are we going to do
for the patients, and what we’re able to do is get the benefits of exchange without
running into the barriers of repugnance. So let me just close with a thought
on what is a free market? Because here I am designing markets and
that can seem like a funny thing. And I think the right metaphor to look at
is a free market isn’t a market without rules it’s a market with rules
that allow it to operate freely. The New York stock exchange has lots of
rules, and some of them are laws that if you violate you can go to jail,
rules against insider trading. And they’re designed to help make it
a very efficient collaborated market. So I think a good metaphor is you think
of a wheel that could rotate freely. It rotates freely because it has
an axle and well-oiled bearings, and that’s what lets it go. So I think the political
discussion on free market is often that free markets are laissez-faire,
they don’t have rules at all. But very few markets are like that. When you get jobs, when you apply for
colleges, when you buy and sell stocks on
the New York Stock Exchange, you’re engaging in markets
that have a lot of rules. And if if the markets are designed well, then the rules allow
the market to work well. So a big part of that of course
is is handing out information. Moving it around and helping aggregate it. So I was advised that I should end
by telling you some stories and giving you some advice having
to do with the Nobel prize so here is a picture of me and
the king of Sweden. I’m the guy on the left. [LAUGH] Let me tell you a story,
you hear about the Nobel prize in a phone call in the middle of
the night if you live in California. But the guys giving the phone call
have some experience at this. And it turns out, the thing that they’re
really concerned with, is that you shouldn’t think its a hoax, so they
call you up in the middle of the night. We actually missed the first phone call,
my wife said I think the phone’s ringing and I woke up and it wasn’t ringing but
they called back. And the guy on the phone says, and I still don’t know who it was who,
waive the initial cost, Swedish accent. And he said you’ve won the Nobel Prize. He said but
I’m here with six of my colleagues and two of them are people you know. And they’re now going to tell you. So that was their way of I guess forestalling that you should say come on,
who is this? Is that Ted? [LAUGH] You know? [LAUGH] And they did that
actually at 3:30 and they said so it’s not going to be announced for
half an hour yet, keep it a secret.>>[LAUGH]
>>And what I did in that half hour and this is my advice,
well I didn’t have half hour. I took a shower and I got dressed and if
you’re ever in that situation, you should definitely do that because there isn’t any
time afterward for the next many hours. It was a busy day. Fun, but not relaxing. So, it’s great for
me to be back at Stanford. I welcome you back to Stanford. And there was one slide I skipped,
let me just tell you about that. What do markets do? What do market places do for markets? They have to make the market thick. They have to bring enough
people together to make the transactions that will
make the market work. And once you have those people
together sometimes it’s hard to do the transactions. With kidneys it’s because
they operate in rooms but you have a lot of
transactions to consider. So markets have to become
uncongested to work well and they have to be safe to participate in and
some kinds of transactions are repugnant. So I think when you go back
out into the market place, if you about these things you’ll
get a chance to see markets and market institutions in a little bit of
a different way and that’s a good thing. So thank you very much.>>[APPLAUSE]>>I’ve used up our time, but I am willing to take questions,
if there are questions. Are there microphones around? Here you go. There’s people with microphones to.>>It’s live, yeah. Thank you, that was fascinating. I’m just curious, you said there’s no contracts because then
it would be value consideration, etc. But you have a chain of 60 people, so somewhere along the line you
get a guy who goes, we’re good. you know.>>Yes, absolutely. So the non simultaneous donors, so we do them in batches and
then there’s bridge donors. And the nurse social workers
transplant coordinators they talk to these people beforehand and they don’t
nominate everyone to be a bridge donor. Our reneg rate,
our broken link rate is 2%. So one of the things economists
are learning is this thing called behavioral economics. One of the things economists are learning
is people are a lot nicer than we give them credit for. But, this is a more complicated
transaction than that. Supposing it’s costly, it’s a big deal,
but let’s think about it. Supposing you are going to
be the bridge donor. Why are you the bridge donor? Well, you had signed up to give
your sister, or your wife, or your mother a kidney and you weren’t
able to but because of your willingness, your sister gets a kidney. And now, you’ve agreed that next Tuesday
at 5:30 in the morning you’ll show up at the OR and give a kidney. Future Thanksgivings at your
family are going to remember how you saved your sister’s life. The discussion will be a lot funnier if
you didn’t give the kidney in the end so, you know, those Thanksgivings would. That would be a different story. So I think,
I’m not quite sure what goes into it, but once the transplant coordinators
say we’ve talked to this person and he’s good to go, they almost always are.>>Could you talk a little bit about
the key elements as you see them for market design for school choice.>>Yeah, well so thickness has to do
with getting all the schools involved. Some schools sometimes have some
volition and if it’s a simple district, school district, they can command all
the schools and then this isn’t a problem. But if there are a lot of charter
schools and things like that they sometimes have to be coordinated so
that you can get all the schools together. So that you can deal with congestion. Because what’s congestion
in a school choice system? It’s many children having multiple offers
while many more don’t have any offers because multiple offers are being held and
wait lists are being formed. So when we looked at this in New York City
initially for New York City high schools, we found that 17,000 children a year
were getting multiple offers. And about thirty thousand at the end of
the process had to be put into schools to which they had expressed
no preferences just because time ran out on the waiting list. So we looked at the seventeen thousand
who were getting multiple offers and we found they have been asked for
preferences before hand. We found that they almost invariably took
the school that they said they liked best. So one of the things we did is
we organized the systems so that they now only get one offer. They get an offer from the school
that they ranked highest that’s willing to accept them. And that allows a lot more
students to get offers. Another thing that’s going on
is the market has to be safe. So in the city of Boston they had an existing school choice
system that sounded very nice. They tried to give as many people
as possible their first choice. The problem with that is if you
didn’t get your first choice It was very likely that your second choice
was going to be full of people who had listed it as their first choice. So it became very important to think
carefully what you should list as your first choice. You couldn’t just list your first
choice as your first choice. So we now made it safe for
them to do that. We now made it safe in Boston so that families can list the schools in
the order in which they prefer them. And if they don’t get their first choice,
they’ll have just as much chance of getting their second choice as
if they had listed it first. And that lifts a big burden
of strategizing for families. And it also gives the school system
good data on what schools people like. So those are the kinds of market
design things that we think about. And we’ve been able to do them in
a couple of American cities now. Yes you have a microphone for
this gentleman? Here.>>You can go next.>>Sorry.>>Go, go ahead.>>Someone has a microphone already?>>Yes I have a microphone.>>Wave your hand I can’t see you. Thank you.>>Thank you for coming. I find this so fascinating as economist
by training, I love sort of optimization problem in it all but I think one thing,
the next step I have a question in it in all is understandability of the system for
everyone who participates. Because I think that while ideally any
optimal solution would be very elegant, I imagine sometimes they’re quite complex. And in some markets that may not matter,
but somethings like the public school assignment people are sort
of unwilling participants. They don’t have-
>>Absolutely.>>Choose to be part of it. They have to be part of it, and if they don’t understand it,
>>Yep.>>There may be broken trust. There may be confusion. So how does that both go into how you
design the market, and how does what are the implications when you are rolling
it out and trying to make it successful?>>That’s a giant consideration, and
what we’ve come to understand is that communicating about how the system works
is part of the design of the system. So we’ve started to tell school districts
it’s not just that we’ll help you design an algorithm that has good properties but
we’ll help you design an algorithm and a communication package that will help
convey it because indeed we had some startup problems of this sort. So there are two ways, there a couple of ways that a school
choice system can be complex. I just described to you the old system
used in Boston and it was simple. I was able to describe it to you. It was simple to describe, but
it was complex to participate in because you couldn’t just put down your
first choice as your first choice. You had to know all sorts of
things about the schools. For instance, Boston schools
would give sibling priority to children who had an older
sib in the school. And so parents who had children about
to enter kindergarten, if they were in prosperous, well informed, highly educated
neighborhoods, they would develop and intelligence network that knew how
many sibs there were going in. So they’d know how many
places were in each school. It was hard work. So we got a system that’s a little
more complicated to describe but it’s very simple to play. You just decide which schools you like and it’s safe to tell about in public
schools which schools you like. So, the system that we use Is
not that hard to describe, it’s based on the deferred
acceptance algorithm that Lloyd Chapley just got
the Nobel Prize for, he and I shared it. It’s pretty simple to describe,
I won’t do it right now. It’s more complicated to describe than
trying to give everyone their first choice and then give as many people as possible
their second choice in that system. But that system is hard to play. So I think what happens is we
communicate what’s going on, some people understand it. It’s enough, though, if other people just
get the message that it’s safe to put down your true preferences.>>Well thank you, Professor,
this has been fascinating. You must find it very rewarding to have
created work that saved thousands of lives. Can I ask where else you’d
like to see this work applied, what else you’d like to transform?>>Right. So we started with these sort of
centralized marketplaces, not because those are the most common, or whatever,
but because those are the easiest to get your arms around and see where
the design is, where the rules are. But most marketplaces operate
on decentralized rules. And in some of the marketplaces we’ve
worked on, later career doctors in various specialties for instance, what
we’ve done is we’ve change the rules of engagement in decentralized markets,
rules about the market culture. How an offer of employment should be made. How long it should be left open. Whether people can change their
minds under what circumstances. So having rules like that in decentralized
markets is part of their design. And it’s part of their culture,
it’s a soft part of the world. Often when you actually see markets
operating there are conventions about that that make the market work well or badly,
but there may not be trade organizations that can provide guidelines,
although sometimes there are. So I think that we need to do more about
thinking about decentralized markets. We also, as a profession, economists have spent a lot of time
thinking about the price of transactions. But not very much time
thinking about their timing. So for instance now when we
look at securities markets and high speed trading there
are questions about whether would we really loss efficiency if instead
of being able to trade at any time, you could only trade very second on the
second, but that’s a tinny change, right? Because there is very little real economic
information that happens in a second, but of course high speed traders who
can trade in milliseconds, they can force liquidity providers to have bigger
spreads because they can get information, earlier and trade against stale
spreads and things like that. So I think questions like that, you know, how should we have to be thinking about
the microstructure of financial markets are things we’ll surely
have to think about. I see market design everywhere so
if you type market sign in Google, you’ll find my blog by
the name of market design. And I make a post almost everyday. And some of them are not very germane,
but basically, just because I see market
design everywhere. I started it for a class, and
I just wanted them to know, that I could stand up here and tell you
things that could use market design a lot. But you type market design into Google, you’ll see the kinds of things
I’ve been concerned with. One in the back.>>Thank you for that insightful talk. Do you think some of the theories that-
>>Wave your hand, I can’t see you.>>I’m here.>>I got you, okay.
>>Do you think some of the market matching theories are more applicable
in emerging markets where there are institutional gaps?>>Yeah, I think for development economics
I think market design is a big thing. I talked about commodity markets
at the beginning of my talk, and I said commodity markets are easy,
price decides who gets what. But of course,
commodity markets have to be designed. God designed weed, but
wheat isn’t a commodity. Number two red winter weedt is a
commodity, and number two red winter weed, God didn’t make that,
the Chicago Board of Trade made that. Now why is it good to number two
red winter weed as a commodity? Well, wheat is different,
different farmers grow different stuffs. And before we had a commodity market for
wheat. You had to know your farmer, you had
to have someone go out in the field and inspect it. How much white weed is
mixed with the red weed? How much moisture? How many bags? So once you have a commodity and
an enforceable standards. You can all of sudden not care who the
farmer is, the air loads can come by and they can take the number
two red winter weed and mix it together in the rails cars and
not care who it came from but before that the mark for
weed was a matching market. So Ethiopia has just
made a commodity market, a good one, a better one for coffee. So, it used to be if you wanted to buy
coffee you had to send your man to Atticus and he would taste coffee. You know, he would reach the long handle
spoon into big bags of coffee and pull out some beans and
grind them and taste them and decide whether he wanted to
buy coffee from this farmer. Well, now they got this system of market
design where there’s anonymous tasting. There are guys who Who receive
bags of coffee and sample them and don’t know who’s the farmer and they can
make reliable judgements about quality. Turns out, what do I know about this,
because of this I’ve learned about coffee. It turns out what makes
high quality coffee, among other things,
is waiting until the cherry is red. So a coffee bush has a cherry on it,
and the bean is inside. So by the time someone has sold you
the beans you can’t see whether they waited till the cherry was ripe. Whether it was red or
whether it was green. So the cheap way to pick coffee is you go
to some hillside that’s mostly red and you say to your pickers,
go pick all the beans. We’re not coming back here, get them all. But once you have tasters who can tell
that you’ve got unripe beans together with your ripe ones, you say to the pickers, pick only the red cherries and
we’ll come back next week. And we’ll pick the rest, when they’re red. So just having a commodity market, not only does it let places like
Starbucks buy by the ton grade A coffee. But it causes there to be more
grade A coffee because you now get paid back when you take the trouble
to make your coffee grade A. So, I’m not quite sure that’s the kind
of thing you were thinking of. But when I think about emerging markets, you think about how to make the markets
work so that they’ll be able to. They’ll be designed properly to work well
for the conditions that they have there.>>Thank you very much. I’m really interested in
the online currency BitCoin, and I was wondering if you’d
had a look at this. And whether there are any aspects
of that market that you think are fundamentally unworkable, or
if you do think it’s sustainable.>>So
I don’t know much about BitCoin except for what I’ve read in the newspaper. It’s sort of a cross between
paper money and gold, right? It’s a little like gold
because it’s hard to mine, that it’s hard to increase the supply. That’s, I think its advocates
think of that as a good thing, but of course, that’s not a good thing for
an economy-wide currency, because as the economy grows,
you need more currency. And if it’s hard to get,
there can be shortages. But it’s also like paper money,
in the sense that you can’t hold it in your hand,
you can’t use it as a commodity later. You can’t use it to fill teeth or
to make jewelry. It’s fiat money, it’s only money as long as people
are willing to accept it as money. So I don’t see it, and it’s pretty
interesting, the fact that you have to solve computationally hard problems
in order to create a new BitCoin and that this something that can be verified. It is a fascinating example of
an attempt to make a currency. But I can’t see it becoming
a large part of world economy and partly it’s because of the limits. Gold can’t be that large a part of
the world economy for the same reason. Right, you don’t want, here we are talking
about what central banks do and how much unemployment should
go with how much inflation. Gold doesn’t let you do
any of those things. Commodity money made a lot of sense
when we couldn’t do better than that. So BitCoin is almost a commodity money is, except it’s not even a commodity, so
it’s fascinating stuff from what I read. I wouldn’t bet the whole ranch on it.>>[LAUGH]
>>And I think that’s all the time we have for
questions.>>Okay, well, thank you.>>[APPLAUSE] [MUSIC]

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