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Advanced Economicsciences2012

Advanced Economicsciences2012

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Published by Ajit Dash

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Published by: Ajit Dash on Oct 15, 2012
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15 OCTOBER 2012
Scientifc Background on the Sveriges Riksbank Prize in Economic Sciences in Memory o Alred Nobel 2012
STABLE ALLOCATIONS ANDTHE PRACTICE OF MARKET DESIGN
compiled by the Economic Sciences Prize Committee o the Royal Swedish Academy o Sciences
THE ROYAL SWEDISH ACADEMY OF SCIENCES
 
has as its aim to promote the sciences and strengthen their infuence in society.
BOX 50005 (LILLA FRESCATIVÄGEN 4 A), SE-104 05 STOCKHOLM, SWEDENTEL +46 8 673 95 00, FAX +46 8 15 56 70, INFO@KVA.SE
 
 
HTTP
:
//KVA.SE
 
1 Introduction
Economists study how societies allocate resources. Some allocation problemsare solved by the price system: high wages attract workers into a particu-lar occupation, and high energy prices induce consumers to conserve energy.In many instances, however, using the price system would encounter legaland ethical objections. Consider, for instance, the allocation of public-schoolplaces to children, or the allocation of human organs to patients who needtransplants. Furthermore, there are many markets where the price systemoperates but the traditional assumption of perfect competition is not evenapproximately satis…ed. In particular, many goods are indivisible and het-erogeneous, whereby the market for each type of good becomes very thin.How these thin markets allocate resources depends on the institutions thatgovern transactions.This year’s prizewinning work encompasses a theoretical framework foranalyzing resource allocation, as well as empirical studies and actual redesignof real-world institutions such as labor-market clearinghouses and school ad-missions procedures. The foundations for the theoretical framework werelaid in 1962, when David Gale and Lloyd Shapley published a mathematicalinquiry into a certain class of allocation problems. They considered a modelwith two sets of agents, for example workers and …rms, that must be pairedwith each other. If a particular worker is hired by employer A, but thisworker would have preferred employer B, who would also have liked to hirethis worker (but did not), then there are unexploited gains from trade. If employer B had hired this worker, both of them would have been better o¤.Gale and Shapley de…ned a pairing to be
stable 
if no such unexploited gainsfrom trade exist. In an ideal market, where workers and …rms have unre-stricted time and ability to make deals, the outcome would always be stable.Of course, real-world markets may di¤er from this ideal in important ways.But Gale and Shapley discovered a “deferred-acceptance” procedure whichis easy to understand and always leads to a stable outcome. The procedurespeci…es how agents on one side of the market (e.g., the employers) makeo¤ers to those on the other side, who accept or reject these o¤ers accordingto certain rules.The empirical relevance of this theoretical framework was recognized byAlvin Roth. In a study published in 1984, Roth found that the U.S. marketfor new doctors had historically su¤ered from a series of market failures, buta centralized clearinghouse had improved the situation by implementing a1

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