Thursday, June 4, 2020

David Levine on market design, in the Journal of Economic Literature

David Levine uses a book review in the JEL as an opportunity to think about what distinguishes real market design from imitations.

Radical Markets by Eric Posner and E. Glen Weyl: A Review Essay
David K. Levine
Journal of Economic Literature 2020, 58(2), 471–487

Abstract: "At a time when standards of living have improved more than any time in history, this
book makes a proposal for radical change. It is based—loosely—on market design principles. The plan for attacking overlapping ownership is reasonably well thought out. Most of the book, however, proposes to use mechanisms designed for a narrow purpose; to attack real or imagined problems that they are ill-suited to solve. I conclude that while market design has a lot to offer when properly applied, the proposals here are not sufficiently well thought out to constitute a serious plan of action."

And here are his concluding paragraphs:

"The authors have a message. Market design is great and it is easy. Markets are sloppy affairs: sometimes buyers post prices, sometimes sellers, some goods are sold at auction, others on exchanges … some are even sold (sniff, sniff) through bargaining. We can fix this: we’ll replace all of these nasty old markets with a simple clean government run auction. The poor will become rich and the rich will have to work for a living!

"I have a message. Market design is great and it is hard. Allocating oil leases is not the same as allocating the radio spectrum. Thick markets are not the same as thin markets. Auctions are complicated. Private information may lie on the buyer side, on the seller side, or both. Real market designers know this. They tailor solutions to problems: having designed an algorithm for allocating residents to hospitals and faced with the problem of matching kidney donors to patients they did not blindly claim to have solved that problem, but instead dug into the details and designed an algorithm for the kidney matching problem. Real market designers sweat the details: they improve lives and prosperity. Listen to real market designers."

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