TARP auction: Bank of England version

My hotel in Maastricht is housed in an old (renovated) church, and it now has excellent internet connections, so I can blog a bit more than I expected.

Paul Klemperer has written a paper on auction design for England's version of the Troubled Asset Recovery Program. It is called
A New Auction for Substitutes: Central Bank Liquidity Auctions, the U.S. TARP, and Variable Product-Mix Auctions.

It describes a sealed bid auction, required because of the speed and interdependence of markets for financial products:
"a multi-stage auction was ruled out because bidders who had entered the highest bids early on might change their minds about wanting to be winners before the auction closed, and because the financial markets might themselves be influenced by the evolution of the auction, which magnifies the difficulties of bidding and invites manipulation."

Maastricht conference on Matching, Coalitions, Networks and Behavior

I will likely not blog again until the middle of next week, as I'm travelling.

On Friday and Saturday I will be participating in the 2009 Coalition Theory Network (CTN) Workshop, on Matching, Coalitions, Networks and Behavior. Here is the program. (I understand that Matt Jackson (one of the keynote speakers) will also be giving a tutorial on network models in economics, today.)

I'll be presenting a talk on Kidney Exchange (at the very end of the conference), and I'll be a discussant on another one:
Feasibility Constraints and Protective Behavior in Efficient Kidney Exchange by Antonio Nicolo and Carmelo Rodriguez-Alvarez.

There will be a number of papers presented at the conference closely related to topics I've explored on this blog, including (for example) Breaking ties in school choice: Specialized Schools and Walk-Zones, by Lars Ehlers and Alexander Westkamp.

That paper particularly caught my eye because, right after the Maastricht conference, I'll go to Brussels to participate in a conference on school choice. Scho0l choice is a controversial political topic right now in Belgium, about which I hope to learn more.

Contract Design: Rights of First Refusal

Brit Grosskopf and I have just published a paper on an interesting variant of a familiar contract. It's called: "If you are offered the Right of First Refusal, Should you accept? An Investigation of Contract Design," Games and Economic Behavior, Special Issue in Honor of Martin Shubik, 65 (January), 2009, 176–204.

It came about when our attention was drawn to the unusual right of first refusal that NBC had been given by Paramount Studios when it came time to renew the broadcasting agreement for the tv show Frasier, in January 2001.

Here's the Abstract of the paper:

"Rights of first refusal are contract clauses intended to provide the holder of a license or lease with some protection when the contract ends. The simplest version gives the right holder the ability to act after potential competitors. However, another common implementation requires the right holder to accept or reject some offers before potential competitors are given the same offer, and, if the right holder rejects the initial offer, allows the right to be exercised affirmatively only if competitors are subsequently offered a better deal (e.g. a lower price).
We explore, theoretically and experimentally, the impact this latter form of right of first refusal can have on the outcome of negotiation. Counterintuitively, this “right” of first refusal can be disadvantageous to its holder. This suggests that applied contract design may benefit from the same kind of attention to detail that has begun to be given to practical market design."

Here's an interview I gave on the subject: When Rights of First Refusal Are a Bad Deal

Incidentally, in case you think contract design falls outside the range of "market design," I agree that we haven't hit on the unconstrained optimum terminology for our new field. I tried to spark the use of the term "design economics" in a 2002 manifesto, which might have more naturally included all the things that economists can help design (e.g. marketplaces, contracts, organizations, laws, treaties...). But languages are like economies (and both are like oceans to the extent that you can't hold back the tide), so I'm cheerfully resigned to having all sorts of economic design included under the heading of market design. I guess we're just taking a very broad view of what constitutes a market...:)

Market designer in chief

President Obama's inaugural address touched on many themes, and spoke to many people. Here's what he had to say on market design:

"Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control -- and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart -- not out of charity, but because it is the surest route to our common good."

Market for inauguration tickets, continued

Reports are that Last-Minute Tickets Are Scarce, as scalpers have relatively few tickets to sell. Many people with tickets to Obama's swearing in are apparently planning to attend.

"Senator Dianne Feinstein of California, who is chairman of the Joint Congressional Committee on Inaugural Ceremonies, has been trying to criminalize the scalping of Inaugural tickets. So far, only the Senate has passed her bill, which would make it a misdemeanor to sell or attempt to sell tickets to the swearing-in ceremony, punishable by up to $100,000 and up to a year in prison. But the bill isn’t going anywhere, unless the House suddenly decides to make it a priority in the next few hours.
Some places like eBay and its subsidiaries banned the sale of Inaugural tickets. But that hasn’t stopped other private ticket agencies, which are doing a fairly brisk business in tickets for other inaugural events, but not the swearing-in ceremony."

Market for (seventh grade) basketball players

Got game in 7th grade? NCAA says you're a prospect

It looks like the NCAA plans to fight unraveling with unraveling:

"Giving in to the young-and-younger movement in college basketball recruiting, the NCAA has decreed that seventh-graders are now officially classified as prospects.
The organization voted Thursday to change the definition of a prospect from ninth grade to seventh grade — for men's basketball only — to nip a trend in which some college coaches were working at private, elite camps and clinics for seventh- and eighth-graders. The NCAA couldn't regulate those camps because those youngsters fell below the current cutoff."

HT Steve Leider

Market for human breast milk

The New Yorker reports on mother's milk: Baby Food. It turns out that this is a repugnant market: "Can a human-milk bank pay a woman for her milk? (Milk banks provide hospitals with pasteurized human milk.) No, because doing so would violate the ethical standards of the Human Milk Banking Association of North America." Long before breast pumps, mothers who couldn't or didn't wish to breast feed hired other lactating women as"wet nurses," but it turns out that this practice, while ancient, has also been repugnant in some times and places: "... contracts for wet nurses have been found on scrolls in Babylonia." ... "Mary Wollstonecraft, in her “Vindication of the Rights of Woman” (1792), scoffed that a mother who “neither suckles nor educates her children, scarcely deserves the name of a wife, and has no right to that of a citizen.” The following year, the French National Convention ruled that women who employed wet nurses could not apply for state aid; not long afterward, Prussia made breast-feeding a legal requirement. " The article also comments on fashion and socioeconomic class: "By the nineteen-tens, a study of a thousand Boston women reported that ninety per cent of the poor mothers breast-fed, while only seventeen per cent of the wealthy mothers did. (Just about the opposite of the situation today.)"... " (A brief history of food: when the rich eat white bread and buy formula, the poor eat brown bread and breast-feed; then they trade places.)"

Property rights and real estate: Squatting in Britain

Markets allocate rights, but laws determine what those rights entail. Britain's real estate laws are unusual in giving owners only limited rights to their property when it is unoccupied. The Washington Post reports: Recession Revives Britain's Squatter Movement

"Squatting -- taking up residence in a vacant building -- has been a tradition in Britain since at least the 14th century, as well as a barometer of the times. It boomed after each of the 20th century's two world wars, when returning soldiers needed places to live, then picked up steam again in the radical 1960s.
Now, despite local governments' efforts to discourage it, squatting appears to be on the rise once more as a deep recession hits the country.
In Britain, trespassing is a civil offense, not a criminal one. Provided the squatters do not break a window or door to enter or otherwise damage the property, police are largely powerless to remove them.
Landlords must petition a court for an eviction order, and they can be prosecuted if they attempt to remove the intruders by force. " ...

""The owners are upset and distressed about this. They can't understand how the squatters can be permitted to break into their house and live there," said Andrew Jeffrey, a lawyer who represents the owners of the Mayfair house. "In nine out of 10 countries around the globe, this would not be tolerated, and the police would remove them immediately."
Nic Madge, a circuit court judge in London and a specialist in property law, said proposals in the 1970s to criminalize squatting were defeated in the face of "considerable political opposition."
"The standard British sign, 'Trespassers will be prosecuted,' is generally a legal fiction," Madge said. "

"Ron Bailey, an activist who started Britain's modern squatting movement in 1968 and has written books about squatting, said Britons have a history of sympathy for the practice that goes back hundreds of years. "We look at it as a social good," he said. "If it's a house left empty for a long time, I don't think people see anything wrong with it."

Market for matchmakers: sorting by price

Dating and matchmaking services vary widely on a number of dimensions, one of which is price. Below I'll talk about services whose prices vary from zero to an initial fee of $20,000. One question is how much if anything does that already tell you about who might use which services?

Penny-Pinchers Might Unite at Free Dating Site
"Match.com, which is owned by Internet company IAC/InterActiveCorp and also runs dating site Chemistry.com, was set to announce Thursday the launch of DownToEarth.com. ...DownToEarth.com joins other free dating sites like Plentyoffish.com and OkCupid.com, and expects to bring in revenue from ads. It is geared toward Web dating newcomers and lets users put up post-rendezvous ratings regarding the truthfulness of others' pictures and profiles."

Online Dating Putting You Off? Try a Matchmaker
"Matchmakers prescreen potential matches, focusing on long-term compatibility rather than “short-term chemistry,” Ms. Clampitt said.
While online sites allow unlimited fantasizing, matchmakers encourage clients to take their heads out of the clouds. “Sometimes we will get a guy who is a good-looking man, but no Brad Pitt, and he wants a thin model,” said Shoshanna Rikon, the owner of Shoshanna’s Matches, a Yenta-style matchmaking service in Manhattan that includes an in-person interview and a Web presence, and charges about $1,500 for eight dates. “We try to be more realistic with who we set him up with.""

The New Arranged Marriage
"Janis Spindel Serious Matchmaking Incorporated's fees begin -- begin! -- at $20,000 for an initiation fee, plus $1,000 for a one-year membership that includes 12 dates. That also includes a background check and a home visit, during which Janis spends time with the client, to get a sense of him and verify that he is who he says he is (i.e., rich or very rich). Her image consultant also comes to inspect his wardrobe and, if necessary, make plans to revamp his look. Janis has many clients outside the New York area (in Tampa, Miami, Los Angeles, Toronto, Las Vegas). An out-of-town client must fly Janis and an assistant first class and put them up in a hotel for the home visit. Additionally, a marriage bonus is expected -- sometimes it's a car or extravagant jewelry; other times it's cash. She has received gifts in the $75,000-to-$250,000 range. "

This latter service primarily charges fees to men, and actively recruits attractive women to match them to. This reminds me of a 1993 paper by Mark Bagnoli and Ted Bergstrom called "Courtship as a Waiting Game" which considers why husbands are often older than wives. In their model, people live for two periods. In period 1, men and women are each endowed with a "quality" between 0 and 1, and a woman's quality is common knowledge at period 1, but, although men know their own quality at period 1, it only becomes common knowledge at period 2. So, in their model, the highest quality men wait until period 2, and marry the highest quality women. I guess that, in this model, the $20,000 above would be a signal of male quality... :)

Of course, the value of a match could be a subject of dispute; e.g. here's an 1885 report from the NY Times about a matchmaker suing to receive his full fee after a marriage was arranged but called off. Needless to say, matrimony need not be the only object of matchmaking; Daniel Hamermesh has a Freakonomics post describing an internet site "Ashley Madison, which matches up married women and men who wish to have a quick fling. " (I couldn't figure out their fee structure from the easy to access parts of their web page, but they do offer a $249 refund under their "Affair Guarantee Program" if you fail to have one...)

Heathrow airport

Heathrow airport is in the process of expanding by adding an additional runway, a process that has run into lots of opposition, the Times reports: Heathrow gets third runway in £9bn deal . The Times further reports that Greenpeace is planning a delaying action: Greenpeace buys Heathrow land earmarked for airport's third runway.

The purchase of land in the way of the runway is only a delaying action, because the government plans to require the sale of the land, by eminent domain. But Greenpeace is hoping that the legal process is congested, and can be made to run very slowly, which might delay the process long enough that it could be revisited after the next election:

"The group also plans to divide the field into thousands of tiny plots, each with a separate owner. BAA, the airport’s owner, would be forced to negotiate with each owner, lengthening the compulsory purchase process. "

Marriage market in Saudi Arabia: age of marriage

Many markets unravel, that is, transactions tend to become earlier and earlier. One example is marriage markets, in which betrothals can sometimes be very early indeed, particularly in polygenous cultures. The NY Times reports that Saudi Arabia's most senior cleric was quoted Wednesday as saying it is permissible for 10-year-old girls to marry .

"Al Sheikh's comments come at a time when Saudi human rights groups have been pushing the government to put an end to marriages involving the very young and to define a minimum age for marriage. ...
"On Sunday, the government-run Human Rights Commission condemned marriages of minor girls, saying such marriages are an ''inhumane violation'' and rob children of their rights.
The commission's statement followed a ruling by a court in Oneiza in central Saudi Arabia last month that dismissed a divorce petition by the mother of an eight-year-old girl whose father married her off to a man in his 50s....
"Activists say the girls are given away in return for hefty dowries or as a result of long-standing custom in which a father promises his infant daughters and sons to cousins out of a belief that marriage will protect them from illicit relationships."

Rental market for textbooks

From Peter Klein at Organizations and Markets: Students: Consider Renting, not Buying, Your Books

"Chegg is the Netflix of college textbooks. Get your book in the mail, along with a prepaid return address label, don’t write in it too much, and send it back once the semester is over. I took a quick look and the savings appear to be substantial for brand-new books, modest otherwise (because there are robust secondary markets for used textbooks). The newest edition of a book I assigned last semester is $127 new from Amazon, $72 for a one-semester rental from Chegg."

HT Steve Leider

Class notes on Market Design

Fuhito Kojima is teaching a Matching and Market Design class at Yale, and he'll post his lectures as they develop.

On my game theory and market design web page I have a list of such classes (below): if I've missed yours, please let me know.

Class notes and materials:
Susan Athey teaches an undergrad class on market design at Harvard: here is her syllabus.
Peter Bossaerts has a course called Designing Market-Based Solutions to Allocation and Communication Problems at Ecole Polytechnique Federale de Lausanne.
Peter Cramton teaches a market design class at Maryland.
Francoise Forges coordinates a program on Du calcul economique a l' economic design at Universite Paris-Dauphine
Fuhito Kojima is teaching a Matching and Market Design class at Yale.
Kate Larson has a course on Electronic Market Design at Waterloo.
Noam Nisan teaches a class called Foundations of Electronic Commerce.
David Parkes has a class on Computational Mechanism Design
Tuomas Sandholm teaches Foundations of Electronic Marketplaces at CMU
Leigh Tesfatsion maintains pages on Electricity restructuring and market design.
Bob Wilson has posted some of his class materials from his market design class at Stanford.
(And here's another link to my market design class at Harvard.)

Thomas Kittsteiner and Axel Ockenfels have a review paper: Market Design: A Selective Review. Zeitschrift für Betriebswirtschaft, Special Issue 5 (2006), 121-143.

Black market for kidneys--in the US?

Some years ago, when I gave a talk on kidney exchange at the Barcelona Clinic, a nephrologist there told me there were hospitals in the US at which I might be able to buy a kidney. Now a story in Newsweek suggests that, perhaps without the hospitals taking an active part, there may be more buying and selling in the U.S. than is easily seen: Not Just Urban Legend.

HT Steve Leider

House swaps

Tight real estate markets make it especially difficult to complete transactions in which each party needs to sell his own house before he can buy another. Michael Ostrovsky points me to a variety of house-swap plans that resemble kidney exchange in various ways, including combinations of two-way exchanges, and larger exchanges and chains.

Here's a Times of London report: If you can’t sell your home, then swap it

Here's a WSJ report: I'll Buy Your HouseIf You Buy Mine

"Both sides of a swap transaction typically close simultaneously -- taking away the risk of being saddled with two mortgages at once, or of having to borrow more after purchasing a new home because your old house didn't sell for as much as you thought it would. When swap partners meet directly online they also save on brokers' sales commissions -- usually 4% to 7% in most markets. If there are homes of unequal value, one buyer provides the cash or gets a mortgage to make up the difference experts say.
Mr. Sawtelle found his swap via a $19.95 listing on OnlineHouseTrading.com, one of at least six swap sites started in the past year. Four have started in just the past seven months, including OnlineHouseTrading.com, GoSwap.org, DaytonaHomeTrader.com and DomuSwap.com. Together the six sites have roughly 16,000 postings. At Craigslist.org, the popular ad site, the number of "home swap" listings -- which includes people trading homes temporarily for vacation -- jumped 56%, to 7,392 in the 12 months ending in December, the company says, and much of the growth came from people trying to permanently sell each other their homes."

Note that even some of the simple game theory that leads to simultaneous kidney exchanges also leads to simultaneous house exchanges, despite the fact that it's perfectly legal to write contracts about the sale of houses.

Market for Allies

A new NBER paper looks at the question.

Can Hearts and Minds Be Bought? The Economics of Counterinsurgency in Iraq by Eli Berman, Jacob N. Shapiro, Joseph H. Felter
Abstract:

Rebuilding social and economic order in conflict and post-conflict areas will be critical for the United States and allied governments for the foreseeable future. Little empirical research has evaluated where, when, and how improving material conditions in conflict zones enhances social and economic order. We address this lacuna, developing and testing a theory of insurgency. Following the informal literature and US military doctrine, we model insurgency as a three-way contest between rebels seeking political change through violence, a government seeking to minimize violence through some combination of service provision and hard counterinsurgency, and civilians deciding whether to share information about insurgents with government forces. We test the model using new data from the Iraq war. We combine a geo-spatial indicator of violence against Coalition and Iraqi forces (SIGACTs), reconstruction spending, and community characteristics including measures of social cohesion, sectarian status, socio-economic grievances, and natural resource endowments. Our results support the theory's predictions:
counterinsurgents are most generous with government services in locations where they expect violence; improved service provision has reduced insurgent violence since the summer of 2007; and the violence-reducing effect of service provision varies predictably across communities.

http://papers.nber.org/papers/W14606

School choice: cost of strategy-proofness

A new NBER paper takes another look at the (old) Boston mechanism.


Ex Ante Efficiency in School Choice Mechanisms: An Experimental Investigation by Clayton Featherstone, Muriel Niederle - #14618 (ED LS)

Abstract: Criteria for evaluating school choice mechanisms are first, whether truth-telling is sometimes punished and second, how efficient the match is. With common knowledge preferences, Deferred Acceptance
(DA) dominates the Boston mechanism by the first criterion and is ambiguously ranked by the second. Our laboratory experiments confirm this. A new ex ante perspective, where preferences are private information, introduces new efficiency costs borne by strategy-proof mechanisms, like DA. In a symmetric environment, truth-telling can be an equilibrium under Boston, and Boston can first-order stochastically dominate DA in terms of efficiency, both in theory and in the laboratory.
http://papers.nber.org/papers/W14618

School choice at sea

"Peer effects" are a potentially big issue in schools, although hard to model. How children affect each others' education can be hard to understand and measure. (What kinds of children do you want your children to go to school with, and what difference does it make?)

For bluefish, in contrast, there is a clear case for assortative matching: "Bluefish are cannibalistic. For this reason, bluefish tend to swim in schools of similarly-sized specimens."

(a market designer joke:)

Market for Humanities Ph.D.'s (and economists)

An email from the American Academy of Arts and Sciences announces some preliminary data from a new project: Humanities Resource Center Online . The section on the Career Paths of Humanities Ph.D.’s has some interesting graphs, like this one, which shows (not surprisingly) that new Humanities Ph.D.'s are much more likely to go directly into academic employment (and much less likely to go into "other employment" or postdocs) than Ph.D.'s in the sciences (broken out by physical sciences, life sciences, social sciences, and engineering).

In a difficult job market like the one this year, economists should feel (relatively) fortunate in the variety of careers open to new Ph.D.'s. The non-academic market for economists also contributes to keeping academic salaries relatively high: The Center for Business and Economic Research at the Sam Walton School of Business of the University of Arkansas posts the results of their annual survey of economics departments, for the academic years 1999-2000 through 2009-2010, including some salary information. Here is the latest one, with prospective information about 2009-10, published January 4.

College football and the BCS National Championship Game

Number 1 ranked Oklahoma will play number 2 ranked Florida Thursday evening in the Bowl Championship Series' National Championship Game, which this year will be played at the Orange Bowl. The championship game is the culmination of a sequence of "bowl" games that the BCS organizes, in which the most successful college teams each season play a final post-season game.

College football doesn't host playoffs. The "championship" game matches the two highest ranked teams at the end of the regular season, based on a more than usually uncertain ranking system (since some of the highly ranked teams will not have played each other). Sports Illustrated just published a story, before the championship game, saying that some of the early bowl games had low Nielsen ratings (which measure television viewership): Ratings are proof the addition of fifth BCS game officially a failure. The article notes
"By removing the top two teams from the existing BCS bowls (Rose, Fiesta, Sugar and Orange), the remaining lineup gets unavoidably watered-down. "

Utku Unver and Guillaume Frechette and I wrote a paper which showed that (under earlier versions of the BCS system) the championship games drew enough extra television viewers to make up for the lower viewership in other bowl games that (consequently) had neither the top nor second ranked team playing in them. (See also this interview about the origin of the BCS system (to which I devoted an earlier post).)

So, while the most exciting thing for some people Thursday evening will be the final score, I'll be waiting to hear the final Nielsen ratings.


(Our European colleagues are always bemused by the large role that college plays in the life of American football players, not to mention the role that football plays in the life of American colleges. While some professional sports have minor leagues or the equivalent, colleges serve that role for football. But that's a story for another time.)

10 PM update: here's a Washington Post story on the more than usual uncertainty in this year's rankings, which may lead to a lack of consensus that the winner of the championship game is the best college team. (The president elect for one is on record as thinking that a playoff system would be more rewarding...)