Working Paper: NBER ID: w29367
Authors: Nikhil Agarwal; Eric Budish
Abstract: This Handbook chapter seeks to introduce students and researchers of industrial organization (IO) to the field of market design. We emphasize two important points of connection between the IO and market design fields: a focus on market failures—both understanding sources of market failure and analyzing how to fix them—and an appreciation of institutional detail. \nSection II reviews theory, focusing on introducing the theory of matching and assignment mechanisms to a broad audience. It introduces a novel “taxonomy” of market design problems, covers the key mechanisms and their properties, and emphasizes several points of connection to traditional economic theory involving prices and competitive equilibrium. \nSection III reviews structural empirical methods that build on this theory. We describe how to estimate a workhorse random utility model under various data environments, ranging from data on reported preference data such as rank-order lists to data only on observed matches. These methods enable a quantification of trade-offs in designing markets and the effects of new market designs. \nSection IV discusses a wide variety of applications. We organize this discussion into three broad aims of market design research: (i) diagnosing market failures; (ii) evaluating and comparing various market designs; (iii) proposing new, improved designs. A point of emphasis is that theoretical and empirical analysis have been highly complementary in this research.
Keywords: Market Design; Industrial Organization; Market Failures
JEL Codes: C78; D47; L00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market design (D40) | economic outcomes (F61) |
| well-designed markets (D47) | coordinate and incentivize behaviors (L21) |
| poorly designed markets (D47) | inefficient allocations (D61) |
| market design (the algorithm) (D47) | wages (J31) |
| market power (L11) | influence prices through market design (D47) |
| market design + market power (D49) | diagnose and remedy market failures (D47) |