Market Design

88 Pages Posted: 21 Oct 2021

See all articles by Nikhil Agarwal

Nikhil Agarwal

Massachusetts Institute of Technology (MIT) - Department of Economics; Yale University - Cowles Foundation

Eric B. Budish

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 20, 2021

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.

Section 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.

Section 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.

Section 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.

JEL Classification: C78,D47,L00

Suggested Citation

Agarwal, Nikhil and Budish, Eric B., Market Design (October 20, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-124, Available at SSRN: https://ssrn.com/abstract=3946495 or http://dx.doi.org/10.2139/ssrn.3946495

Nikhil Agarwal

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Eric B. Budish (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8453 (Phone)

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