School choice in Europe

I've frequently blogged about the design of school choice systems, and that is in part because the problems of school choice are so widespread, and difficult.

In Flanders, where there is a first-come-first-served allocation system, parents have been camped out for a week in winter weather to secure places for their children (here is a story, in Flemish, with a picture).

In England, where lotteries decide many school allocations, the costs of randomness are being felt: Identical twins go to schools 18 miles apart.

We now do better than that in NYC and Boston.

Another contested auction, and some precautions

In an earlier post, Auction disruption by fake bids, I followed an auction of Chinese artifacts that was opposed by the Chinese government, and was ultimately disrupted when the high bidder indicated that his bid was fraudulent. Today's news is of an auction in Manhattan of Gandhi memorabilia (a watch and some other personal property) opposed by the Indian government (which had offered a pre-emptive bid of $20,000 for the items in an attempt to halt the sale, and had obtained an injunction in an Indian court when this was refused): Gandhi Items Sold for $1.8 Million.

The high bidder was an Indian national who may or may not be planning to donate the items to the Indian government. The auction house took some steps intended to protect themselves against the kind of disruption by false bid that occurred in the auction of Chinese artifacts.

"For the first time, Antiquorum Auctioneers, which focuses on watches, is requiring banking references, said Mr. Maron, the chairman.
Recently, Cai Mingchao, a collector and auctioneer, raised an uproar after he submitted two winning bids for bronze sculptures from China’s Qing Dynasty at a Christie’s auction in Paris. Mr. Cai later refused to pay for the items, saying he had deliberately sabotaged the auction because the sculptures had been illegally looted in the 19th century from an imperial palace outside Beijing.
“We are concerned about what happened at Christie’s,” Mr. Maron said in a phone interview. "

Trust and trustworthiness: promoting and maintaining it

Trust is essential for all sorts of transactions, and how to set up institutions to promote trust and trustworthiness in the marketplace is a big concern of market design.

It is even a big concern of armies trying to win the hearts and minds of a population in the face of a guerrilla insurgency. There's a very interesting essay in the Washington Post about earning, maintaining and restoring trust, by Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff: Building Our Best Weapon.

On a more technical note, I'm reading Community Structure and Market Outcomes: Towards a Theory of Repeated Games in Networks by Itay Fainmesser (who you can try to hire next year). He is interested how patterns of connections between buyers and sellers can promote trustworthy behavior through repeated play, and how the effort to achieve trust in the marketplace by engaging in long term relationships may exclude some parties from the market. In this connection he writes "...repeated interactions cannot perfectly substitute for institutions..."

The kinds of institutions he is thinking of are both legal (if you can sue me for non-performance, this makes it easier to trust me), and reputational (if you can give me a credible negative review that will impede my ability to transact in the future, this also makes it easier to trust me).

As it happens, I've also been reading about the recent redesign of eBay's reputational system: "ENGINEERING TRUST - RECIPROCITY IN THE PRODUCTION OF REPUTATION INFORMATION," - by Gary Bolton, Ben Greiner, and Axel Ockenfels. It is a very nice market design paper.

They describe some of the design concerns behind eBay's 2007 rollout of its new, more detailed feedback system, in which buyers are able to give some feedback on sellers anonymously. In particular, they describe how they and eBay became concerned that the old reputation system became less informative than it might have been, because the pattern of reciprocally positive feedback concealed underlying dissatisfactions. They describe how (both prospectively and retrospectively) they compared the relevant field data, and how laboratory experiments helped verify the intuitions gained in that way, and allowed them to see the efficiency effects of an improved reputation system.

Student loans

"If Congress approves the plan, there will be no need to set subsidies because there will be no banks to subsidize. "

No no, not the current bank bailout (although it's easy to see how that sentence could be misinterpreted). In this case it refers to an auction the federal government is planning to hold to determine which lenders will be authorized to issue federally subsidized student loans: Education Dept. Forges Ahead With Student-Loan Auction. The idea is that banks would submit bids indicating how much federal subsidy they would require to issue student loans on agreed terms, and the lowest subsidies would win.

But "...by the time the auction process is complete, it could be moot. President Obama has called for abolishing the guaranteed-loan program altogether. If Congress approves the plan, there will be no need to set subsidies because there will be no banks to subsidize. "

Markets for studying

The NY Times reports on incentive programs designed to motivate students to study, and on some apparent controversy between economists and psychologists interested in the subject: Rewards for Students Under a Microscope.

My colleague Roland Fryer is organizing several of these incentive programs, in collaboration with schools in NYC, Washington DC, and Chicago, through Ed Labs at Harvard.

The Times story reports that some psychologists are skeptical, because of concerns that incentives may damage intrinsic motivation:
"Still, many psychologists warn that early data can be deceiving. Research suggests that rewards may work in the short term but have damaging effects in the long term.
...
"This kind of psychological research was popularized by the writer Alfie Kohn, whose 1993 book “Punished by Rewards: The Trouble With Gold Stars, Incentive Plans, A’s, Praise and Other Bribes” is still often cited by educators and parents. Mr. Kohn says he sees “social amnesia” in the renewed interest in incentive programs.
“If we’re using gimmicks like rewards to try to improve achievement without regard to how they affect kids’ desire to learn,” he said, “we kill the goose that laid the golden egg.” "

But the story gives Roland the last word:
"Meanwhile, Dr. Fryer of Ed Labs urges patience in awaiting the economists’ take on reward systems. He wants to look at what happens over many years by tracking subjects after incentives end and trying to discern whether the incentives have an impact on high school graduation rates.
With the money being used to pay for the incentive programs and research, “every dollar has value,” he said. “We either get social science or social change, and we need both.”"

Auction disruption by fake bids

In an earlier post, Markets and Fraud, I discussed the case of an environmental activist who disrupted an auction for oil and gas drilling rights by submitting the winning bids on several tracts. Now comes a report of an auction by Christies of some Chinese bronzes that the Chinese government claims as national cultural artifacts: Chinese Man Bids but Won’t Pay for Looted Bronzes , and Chinese Bidder Says He Won’t Pay for Looted Bronzes

"A man claiming to be the mysterious bidder who bought two Qing dynasty bronzes at an auction in Paris surfaced Monday, saying it was his patriotic duty to refuse to pay the $40 million winning bid.
A Chinese collector and auctioneer, Cai Mingchao, said at a news conference in Beijing he had made the anonymous winning bids for the 18th-century bronze heads of a rat and a rabbit. He described himself as a consultant with the Lost Cultural Relics Recovery Program, a nongovernmental group that seeks to bring looted artifacts back to China.
...
"On moral grounds, and as a way to protest the auction, Mr. Cai added, “I want to emphasize that the money won’t be paid.”"


"The Chinese government had attempted to halt the sale of the relics, saying they should be returned, not sold.
However, the government denied having anything to do with the fake bid."
...
"In a statement, Christie's said: ''We are aware of today's news reports. As a matter of policy, we do not comment on the identity of our consignors or buyers, nor do we comment or speculate on the next steps that we might take in this instance.''"

One aspect of auction design that may need greater attention if these kinds of disruptions become commonplace is how to qualify and verify bidders and winners, and notify other bidders in the event that winners default, so that auctions can be made more resistant to attack by fake bidders.

Design of electricity markets (and salute to Bob Wilson)

For roughly the retail price of 1200 kilowatt hours of electricity, you can buy the Elsevier book Competitive Electricity Markets: Design, Implementation, Performance . (It seems to have been out for almost a year, but I've just noticed it now...)

I haven't read it yet, but the first chapter looks worthwhile: it is by Hung-Po Chao, Shmuel Oren, and Robert Wilson, and is called "Reevaluation of Vertical Integration and Unbundling in Restructured Electricity Markets."

Bob Wilson is of course the dean of design, one of the pioneers not only of the design of electricity markets, but of auction design generally. Here are some of his papers. (And for those of you who come only recently to the economics biz, and don't know what a role model looks like, here is his cv.) Chao and Oren and Wilson seem to have published their first joint paper on electricity in 1986.

While I'm remembering, I'm reminded that Bob's students produced an online Festschrift in his honor in 2002, called Game Theory in the Tradition of Bob Wilson. Here are the first paragraphs of the introduction, which was written by Bengt Holmstrom, Paul Milgrom, and myself.

"One of the nicer events in academic life is when we pause to recognize a scholar whose work is unusually important and influential, whose work marks the start of a new tradition.

"When that scholar is also a great teacher and advisor, his students have the added pleasure of recalling his influence on them, and how it is reflected both in their own scholarship, and in how they teach and advise their own students. Students are the generations through which traditions are transmitted. This volume of selected published papers by Bob’s students, accompanied by new introductory essays, is a celebration of Bob’s tradition, by those of us who had the exceptional good fortune to receive it at first hand.

"And what is this tradition? Scholarship as varied and wide ranging as Bob’s defies easy characterization. He was among the first to recognize that it was going to be of the utmost importance for game theorists to understand how information is distributed and manipulated, concealed, and revealed. He was among the first to emphasize the importance in strategic calculations of players’ beliefs about what other players would do, even in situations that were not anticipated to arise. But what especially marks him as a leader among the great economists of his generation is his view of the role of theory. In his understated way, he wrote in the preface to his book Nonlinear Pricing: “The value of theory is its usefulness in addressing practical problems. . . ” And he went on to reflect on the role of practical problems in his own scholarly development: “. . . for the theorist, the problems encountered by practitioners provide a wealth of topics.”

"So, game theory in the tradition of Bob Wilson is game theory in the service of economics as a confident, practical, useful discipline. And research in the style of Bob Wilson is work that takes its inspiration not only from a wide reading and deep understanding of the work of other academics, but also from the ordinary stuff of economic life. In this spirit, Bob’s work has produced not only acute conceptual insights of great generality, but also advice about and solutions to knotty problems of strategy and design."

Medical data as an underprovided public good

Evidence based medicine requires data that are often difficult to assemble. Since drugs and medical devices are regulated, regulators have the option of requiring data to be collected. But data collection costs money (particularly in light of stringent laws that require the privacy of individual patients to be protected), and so it is often difficult to study the effect of medical interventions by following up on the health of patients.

A recent story summarized the issue succinctly: Heart Device Dispute Renews Push for User Registry

"Conflicting data this week about the failure rate of a critical and widely used Medtronic heart device has set off a debate among researchers who want to understand the discrepancies and the implications for patient care.
But some experts say that debate would not be occurring if federal officials, medical device makers and more doctors had thrown their weight more fully behind efforts to develop a national database of patients who get heart devices.
The Obama administration has announced plans to pour hundreds of millions of dollars into studies to compare the effectiveness of competing medical treatments and devices. Monitoring patients’ outcomes through registries could be part of that process.
But setting up such registries in this country has proved difficult so far. "

It seems that Medicare mandated the establishment of such a registry for defibrillators, but didn't fund it.

"And while defibrillator makers did help support the $3 million annual cost of operating the registry in its first year, they have since cut back that financing... Dr. Alan Kadish ... said he did not think that manufacturers believed that they would “be fulfilling their fiduciary obligations to shareholders by funding” studies that compare the effectiveness of their devices to those of competitors. " "

HT Scott Kominers

Real estate auctions for price discovery

Sales by auction are coming to the new condo market in New York City: And Do I Hear $2 Million? No? $1 Million? Sold!

"Real estate auctions, rarely used in New York, have the potential to both move property and indicate to reluctant buyers what the true market prices are. Given the current sales drought, even a handful of auctions could reset prices for new condominiums citywide, said Jonathan J. Miller, the president of Miller Samuel, a Manhattan research and appraisal company. He said he expects the auctioned properties to sell for 40 to 45 percent below the asking prices of the first quarter of 2008, when the market peaked"
...
"In the auctions run by Accelerated, only a portion of a building’s unsold units are sold in one swoop, to avoid depressing values more than necessary. The remainder are marketed the traditional way, at the new, lower auction prices. "
...
"Auctions have succeeded in loosening other battered markets, like South Florida. In two held there last fall by Accelerated, 30 to 40 units in partly sold developments went for about half their peak prices. The developers say sales have picked up since then, at prices slightly below those received at auction. "

The real estate auction firm mentioned in the article is Accelerated Marketing Partners, of Boston.

Kidney Exchange in Australia

Western Australia has a new Kidney Exchange Program directed by Professor Paolo Ferrari of the University of Western Australia. Like kidney exchange programs in the U.S. they are finding the benefits of organizing exchanges as chains: Domino donations reduce kidney transplant wait .

"Prof Ferrari said he expected a national paired kidney exchange program to be established in 2009."

It looks like his confidence is well founded, since when the Prime Minister of Australia gave a speech on organ donation (Rudd opens Organ Donor Awareness Week), he included the following: "The [Australian Organ and Tissue Donation and Transplantation] Authority is also working to implement the new National Paired Kidney Exchange Program"

Market for hand crafted food

Like the town that was too small to support one lawyer, and so had to have two, Brooklyn is becoming a center of artisan-produced fine food: Brooklyn’s New Culinary Movement. Not only does a cluster of local food producers help build demand, they also support each other in production:

"To design a boning knife, Mr. Bukiewicz has been sitting in on Mr. Mylan’s butchering classes and taking note of how his hands move.
That sort of collaboration is common.
Two weeks ago Sixpoint Craft Ales, in Red Hook, introduced Dubbel Trubbel, an ale made with cacao nibs from Mast Brothers Chocolate. Sixpoint Craft Ales already brews Gorilla Warfare, an American porter made with Ethiopian Yirgacheffe from Gorilla Coffee, the Park Slope cafe and roaster. At Wheelhouse Pickles, based in Park Slope, Jon Orren uses wort, a byproduct of brewing from Sixpoint Craft Ales, to flavor his Ploughman’s pickle, a mild, earthy relish made with Greenmarket root vegetables.
And McClure’s Pickles, of Williamsburg, is making a strong, grainy mustard with Brooklyn Brewery’s Brown Ale. (Mr. McClure, by the way, sometimes pays his picklers in pickles.)
Local store owners play an important role, more collaborators than simply merchants. Urban Rustic, Spuyten Duyvil Grocery, Blue Apron Foods, Bedford Cheese Shop and Marlow & Daughters all make a point of carrying Brooklyn-made foods."

Market for Camembert

An important part of European Union trade law is the control of the Appellation d'origine contrôlée (AOC). (This is the locational brand name that, for example, makes Champagne--sparkling wine made in the French Champagne region using the methode champagnoise--different from Cava, the sparkling wine made in Spain by the same method. Which brings us to the question of Camembert de Normandie, the French cheese that, according to the Camembert Charter, must be made by hand from raw (unpasteurized) milk.

Because raw milk can harbor disease causing bacteria, the costs of making cheese safely from raw milk is greater than from pasteurized milk. Because of health concerns, the U.S. Food and Drug Administration controls the interstate sale of raw milk and cheeses made from raw milk. All of which brings us back to France, the home of both Camembert and pasteurization. Der Spiegel reports that one of France's largest cheese producers has just given up a long campaign, citing health concerns, to change the Camembert Charter to allow pasteurized milk to be used. But consumers and other producers successfully resisted, and it remains the case that no cheese made with pasteurized milk can be sold as le Camembert de Normandie.

I can't quite tell if this is brand protection, some other kind of protectionism, or if it is related to the kind of repugnance associated with the resistence to genetically modified crops in Europe. But it makes for a good story, and reflects some of the complexities of buying, selling, and labelling food.

Assisted suicide, Right to Die

We say that a transaction that some people want to engage in is "repugnant" if other people don't want them to, and assisted suicide fits the bill; it remains a crime in most states. But the demand for dignified death by the terminally ill means that the issue raises its head time and again. The NY Times reports: 4 Charged in Multi-State Suicide Assistance Probe .

The organization in question in this case is the Final Exit Network, and the particular charge is that they offered advice and moral support to a terminally ill Georgia man.
"The Georgia man's mother, Betty Celmer, contended that the group shouldn't face charges if they helped her son.
''If they helped John to die, that is what he wanted. I would never find them guilty for helping him,'' she said. ''If someone helped him, I think that was in God's hands.''"

A quick search on the web reveals that the venerable Hemlock Society is no more, but that there remain non-profit organizations devoted to the idea of dignified death, its discussion, and to changing legislation on the subject: here is the website of the World Federation of Right to Die Societies.

Kidney Exchange

Miller-McCune magazine has an article on kidney exchange that gives a pretty good view of some current developments (having to do with exchanges involving compatible as well as incompatible pairs, and chains of transplants started by non-directed donors): Making a Market for Kidneys.

"Using game theory and market-design software, doctors are arranging kidney-transplant "swaps" — sometimes in long chains — to give more people with renal disease better transplant options and healthier futures."

The story mentions both the New England Program for Kidney Exchange, and the Alliance for Paired Donation, the two innovative kidney exchange networks with which Tayfun Sonmez, Utku Unver and I have worked extensively. (One of my longstanding frustrations with the ways in which stories make it into the news, however, is that, while I am mentioned by name in the story, my colleagues are not. I invariably mention this frustration to reporters when they call, but often it doesn't help. It must say something about the market for news, although I'm not quite sure what.

Credit: not repugnant anymore

What a difference a few centuries can make. When Shakespeare wrote The Merchant of Venice, lending money was a repugnant transaction.

When President Obama spoke to Congress Tuesday evening, he had this to say: "You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education, how stores stock their shelves, farms buy equipment, and businesses make payroll."

Market design is coming of age

There are an increasing number of signs that Market Design is coming of age as a distinct area of economics. Here are three.

The National Bureau of Economic Research has formed a new Market Design Working Group. Susan Athey and Parag Pathak have organized its first conference, for May 15-16, 2009. Here is the preliminary program.

My Market Design course at Harvard, which for many years used to stand alone, is this year part of a two-semester sequence, with the second semester being Economics 2056b. Topics in Market Design - (New Course) offered by my colleagues Susan Athey and Greg Lewis. More of our Ph.D. students are choosing market design as a field, and we've had some great graduates in the decade I've been at Harvard (all of whom do other things as well:), including Estelle Cantillon, Muriel Niederle, John Asker, Michael Ostrovsky , Ben Edelman, Parag Pathak, Fuhito Kojima, Robin Lee and (this year) Eric Budish and Mihai Manea.

Oxford University Press is preparing a Handbook of Market Design, edited by Nir Vulcan, Muriel Niederle , and Zvika Neeman.

Market design from the other side of the fence

Market design is both about designing markets (design as a verb) and about understanding the design of existing markets (design as a noun). This latter activity is the way game theorists originally got into the business; by looking at the existing 'rules of the game,' and figuring out how they worked, and could be made to work.

I'm reminded of this by two working papers on auctions, one focused on offering consulting advice to a bidder, and the other on criminal collusion among bidders.

The consulting story is by the A-team of spectrum auction consultants, and recounts some of their recent experience giving bidding advice: Winning Play in Spectrum Auctions by Jeremy Bulow, Jonathan Levin and Paul Milgrom. They focus on the information flows in multi-round auctions, and how the amounts bid in early rounds can help forecast final prices, which is an aid in deciding on which lots to bid:

"In major spectrum auctions, even large corporations need to raise or put aside money in advance to finance their spectrum purchases. Many of these companies also have a broad set of target licenses. If these licenses are substitutes and the budget constraint is binding, the bidder's optimal purchase will involve spending its whole budget or nearly so. Of course not every bidder falls into this category. For bidders with tight budgets and narrow interests, or for entrants with all-or-nothing goals, rising prices could lead them to spend zero once the prices of target licenses rise too high.

"If bidders in the first category account for enough of the money in the auction, a previously unexplored pattern becomes identifiable in the data. Define a bidder's exposure to be the sum of all of its bids in a given round, including its standing high bids from the prior round and all of its new bids in the current round, whether provisionally winning or not. This is the largest amount that a bidder might have to pay if all of its bids were to become winning. If a bidder faces a binding budget constraint and has broad interests, then as prices increase from round to round, its total exposure will eventually level off at an amount approximating its budget. If all bidders were to fall in this category, then the total exposure of all bidders in the auction would rise to the level of the aggregate bidder budgets and level off, forecasting the final auction prices. As prices rise, bidders will narrow the set of licenses on which they bid, the identities of the provisionally winning bidders on various licenses will change, and total winning bids will continue to rise, but final total winning bids will be forecast early and well by total exposure."

The account of criminal collusion is John Asker's A Study of the Internal Organisation of a Bidding Cartel, which tells of a long lived cartel of stamp dealers who agreed in advance which of their members would bid on each lot that they were collectively interested in. (He obtained the data from the prosecution records of the Antitrust Bureau of the New York Attorney General’s Department.) They coordinated among themselves by first holding a "knockout auction" (of roughly the kind that Graham, Marshall, and Richard 1990 described among bidders in New Jersey machine tool auctions), to determine which of the cartel members would be allocated the right to bid on each lot, and what sidepayments would be made following a successful bid. The detailed data allow Asker to estimate the costs that the cartel imposed on sellers and on other bidders who were not members of the cartel.

Real estate auctions

Sales of property by auction seem to rise in bad times: Commercial Auctions Expected to Rise . The attraction of an auction is that it can aid in price discovery, and move quickly.

One such property "is the John Hancock Tower in Boston, which is set to go on the auction block next month. The dire turn of events came after Broadway Partners, based in New York, which bought the tower in 2006 for $1.3 billion, defaulted in January on some loans, prompting a group of mezzanine lenders to hire Green Loan Services, a unit of SL Green, to pursue an auction. (Mezzanine loans are secured by a stake in ownership rather than the actual property; they have become increasingly popular over the last several years of high-leverage deal making.)"
...
"Auction houses are poised for a growing role in commercial real estate. The strengths of the auction model — a faster sales cycle, lower costs, and the ability to quickly determine a fair market value — play into current market conditions.
“It’s tough to put your finger on a price right now,” said Randy Wells, the president of the National Auctioneers Association. He said that comparable sales and listings could be consulted “but it’s guesswork right now,” and that auctions “are really good at finding a current market value in a short amount of time.” "

School choice in England, continued

School choice, a frequent subject on this blog, is a vexed question around the world. In Britain, the Telegraph reports, Children allocated school places on 'roll of a dice': Thousands of children must take part in random lotteries for school places in a Government attempt to break a middle-class stranglehold on the best schools.

"Schools in a quarter of council areas are allocating places by lottery or "fair banding" – in which the school uses test results to deliberately select a proportion of pupils of poor ability.
The move could cause difficulties for affluent families who have dominated successful schools by buying houses within their catchment areas, often paying a premium of tens of thousands of pounds.
Last year, Brighton became the first area to allocate places at all oversubscribed schools through lotteries after Government reforms gave councils and schools the power to do so. The policy is designed to make all state schools truly comprehensive by ensuring they contain pupils of mixed abilities and social backgrounds, rather than being dominated by those who can afford to live nearby."

It turns out that in New York City, where my colleagues and I helped design a high school choice system, some schools ("Educational Option Schools") also require that a full range of student abilities be represented.

Markets for adult entertainments

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