THE PRIZE IN ECONOMIC SCIENCES 2012
INFORMATION FOR THE PUBLIC
Stable matching: Theory, evidence, and practical design
This year’s Prize to
extends rom abstract theory developed in the 1960s,over empirical work in the 1980s, to ongoing eorts to fnd practical solutions to real-world prob-lems. Examples include the assignment o new doctors to hospitals, students to schools, and humanorgans or transplant to recipients. Lloyd Shapley made the early theoretical contributions, which wereunexpectedly adopted two decades later when Alvin Roth investigated the market or U.S. doctors. Hisfndings generated urther analytical developments, as well as practical design o market institutions.
Traditional economic analysis studies markets where prices adjust so that supply equals demand. Boththeory and practice show that markets unction well in many cases. But in some situations, the standardmarket mechanism encounters problems, and there are cases where prices cannot be used at all toallocate resources. For example, many schools and universities are prevented rom charging tuitionees and, in the case o human organs or transplants, monetary payments are ruled out on ethicalgrounds. Yet, in these – and many other – cases, an allocation has to be made. How do such processesactually work, and when is the outcome ecient?
The Gale-Shapley algorithm
Analysis o allocation mechanisms relies on a rather abstract idea. I rational people – who know theirbest interests and behave accordingly – simply engage in unrestricted mutual trade, then the outcomeshould be ecient. I it is not, some individuals would devise new trades that made them better o.An allocation where no individuals perceive any gains rom urther trade is called
The notion o stability is a central concept in cooperative game theory, an abstract area o mathematical economicswhich seeks to determine how any constellation o rational individuals might cooperatively choose anallocation. The primary architect o this branch o game theory was Lloyd Shapley, who developed itsmain concepts in the 1950s and 1960s.Unrestricted trading is a key presumption underlying the concept o stability. Although it allows clearanalysis, it is dicult to imagine in many real-world situations. In 1962, Shapley applied the idea o stability to a special case. In a short paper, joint with David Gale, he examined the case o
: how individuals can be paired up when they all have dierent views regarding who wouldbe the best match.
Gale and Shapley analyzed matching at an abstract, general level. They used marriage as one o theirillustrative examples. How should ten women and ten men be matched, while respecting their indi-vidual preerences? The main challenge involved designing a simple mechanism that would lead to astable matching, where no couples would break up and orm new matches which would make thembetter o. The solution – the Gale-Shapley “deerred acceptance” algorithm – was a set o simple rulesthat always led straight to a stable matching.The Gale-Shapley algorithm can be set up in two alternative ways: either men propose to women,or women propose to men. In the latter case, the process begins with each woman proposing to theman she likes the best. Each man then looks at the dierent proposals he has received (i any), retains