Payday loans: usury, or access to credit? by Allcott, Kim, Taubinsky and Zinman

Payday loans and other expensive services to those without access to formal credit generate a good deal of repugnance and regulation (including bans), but may be the only source of credit available to their habitual customers. Here's a new NBER working paper on that finds that experienced borrowers don't misjudge their chances of borrowing again.

Are High-Interest Loans Predatory? Theory and Evidence from Payday Lending  by Hunt Allcott, Joshua J. Kim, Dmitry Taubinsky & Jonathan Zinman  WORKING PAPER 28799, DOI 10.3386/w28799,  May 2021

Abstract: It is often argued that people might take on too much high-cost debt because they are present focused and/or overoptimistic about how soon they will repay. We measure borrowers' present focus and overoptimism using an experiment with a large payday lender. Although the most inexperienced quartile of borrowers underestimate their likelihood of future borrowing, the more experienced three quartiles predict correctly on average. This finding contrasts sharply with priors we elicited from 103 payday lending and behavioral economics experts, who believed that the average borrower would be highly overoptimistic about getting out of debt. Borrowers are willing to pay a significant premium for an experimental incentive to avoid future borrowing, which we show implies that they perceive themselves to be time inconsistent. We use borrowers' predicted behavior and valuation of the experimental incentive to estimate a model of present focus and naivete. We then use the model to study common payday lending regulations. In our model, banning payday loans reduces welfare relative to existing regulation, while limits on repeat borrowing might increase welfare by inducing faster repayment that is more consistent with long-run preferences.

***********

Update: here's the published paper

Allcott, Hunt, Joshua Kim, Dmitry Taubinsky, and Jonathan Zinman. "Are high-interest loans predatory? theory and evidence from payday lending." The Review of Economic Studies 89, no. 3 (2022): 1041-1084.

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The Federal Reserve’s Term Auction Facility

As the credit crisis unfolded, the Fed prepared to auction funds to banks. Among other design features (such as how expressive a bidding language to allow) they thought about adverse selection: they wanted to reduce the signal value "stigma" of participation.

The Federal Reserve’s Term Auction Facility
July 2008 Volume 14, Number 5
Authors: Olivier Armantier, Sandra Krieger, and James McAndrews

Abstract: "As liquidity conditions in the term funding markets grew increasingly strained in late 2007, the Federal Reserve began making funds available directly to banks through a new tool, the Term Auction Facility (TAF). The TAF provides term funding on a collateralized basis, at interest rates and amounts set by auction. The facility is designed to improve liquidity by making it easier for sound institutions to borrow when the markets are not operating efficiently."

Auction Design: "Once the Federal Reserve concluded that an auction format was an effective funding alternative, it added features aimed at ensuring the most efficient distribution of funds to banks with a high demand. In particular, the Fed established a minimum rate at which bids could be submitted that was set in a comparable, competitive market (rather than a penalty rate, which is set at a premium to existing market rates).This market-based minimum bid rate was likely to encourage participation and reduce any stigma associated with receiving auctioned funds, since banks would not necessarily signal an abnormally high demand by bidding. The Federal Reserve also chose a uniform-price (or single-price) auction rather than a discriminatory (pay-your-bid) auction in part to spur participation further. By using the uniform-price structure common in Treasury auctions, the Fed reasoned that banks would be more comfortable with bidding. Finally, to allow for the widest allocation of funds, the central bank imposed a cap on the bid amount corresponding to 10 percent of the auction size.
The Fed also imposed two important rules. First, based on its experience with option auctions in 1999, it would allow each bidder to make two rate-amount offers. This rule represents the Fed’s resolution of the trade-off associated with multiple rate-amount offers: as the number of offers increases, the auction becomes more complex, but participants are able to make bids that are more representative of their demand. Second, the central bank would require TAF participants to pledge collateral beyond the amount necessary to secure credit in the new facility. This rule was imposed to ensure that bidders in the new facility could still borrow through the discount window’s primary credit facility to meet unexpected overnight funding needs."

Would Professor Moriarty have invented an eBay, a Paypal or a Craigslist?

Professor Moriarty was, of course, Sherlock Holmes' nemesis (or was it the other way around)? I ask the question in the title of this post because a much more modern criminal mastermind has just been sentenced. Here's the headline from the London Telegraph: Mastermind behind 'eBay for criminals' is facing jail

"Renukanth Subramaniam, from north London, established the website DarkMarket, which threatened every bank account and credit card holder in Britain and caused tens of millions of pounds of losses.
It was described as a "one-stop shop" for fraudsters buying and selling stolen details such as PIN numbers, account balances, answers to account security questions and passwords for social networking websites.

"The site even offered criminal users a secure payment system, training and advertising space to sell equipment used to clone bank and credit cards.
DarkMarket operated for almost three years as a “criminals only” forum, with more than 2,500 members at its peak, who could buy up to 10 credit card numbers along with other personal information for around £30.
It was shut down after a two-year global investigation in which undercover agents from the FBI and the Serious Organised Crime Agency infiltrated the site by posing as criminals.
A spokesman for Soca called it “one of the most pernicious online criminal websites in the world” and estimated that its victims lost tens of millions of pounds.
Officials said there was a code of “honour amongst thieves” on the site.
There was a secure payment system between criminals – described by Judge John Hillen as a "PayPal for criminals". "

See my earlier post: More on Darkmarket, the Craigslist of Crime

Pawn shops--high interest loans for the credit challenged

The Telegraph reports on the credit crisis in England: Financial crisis: hard-up consumers are selling jewellery for cash

Pawnbrokers make loans with goods as collateral, and mostly items are redeemed.

"Pawnbrokers are distinct from high street buy-back shops such as Cash Converters, where a customer will sell an item with the option to buy it back 28 days later. If the customer doesn't repurchase the item, it goes into the shop to be sold (items are not usually limited to gold and jewellery; they can be electrical goods, for example).
Pawnbrokers are regulated alongside banks and other lenders by the Consumer Credit Act 1974. Borrowing through a pawnbroker may not be suitable for everyone and high interest rates mean it is not a long-term solution, as they themselves acknowledge, but sometimes it can resolve short-term cash flow problems. "

Treasury abandons plans for reverse auction to purchase troubled assets

The Treasury announced today what had already become clear, which is that it has abandoned the initial plan to purchase troubled assets, in favor of buying equity in troubled companies: Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update

"As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again.
During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks. "

HT to Eric Budish (a market designer on the market)

Peer to peer lending in the credit crunch

Alan Krueger, writing in the NY Times blog, notes that even borrowers with good credit are being moved by circumstance to some of the peer to peer lenders: In Credit Crisis, Some Turn to Online Peers for Cash

Markets for durables when credit is tight

Two stories in the NY Times reflect changes in markets for durable goods and for real estate in the context of tight credit: layaway plans and rent with option to buy, respectively.

The Last Temptation of Plastic reports on the revival of layaway plans, which used to be popular before credit cards. In a layaway purchase, you make installment payments before taking possession of your purchase (e.g. a big furniture purchase); it's a form of enforced savings that locks in a price and helps supply self control and commitment (to save for the purchase) where it might be lacking.

Rent Now, Buy Later reports on the growing number of offerings in the NYC real estate market. These transactions allow potential purchasers to delay purchase until they have a bigger downpayment (and until they see which way the market is going), and they give sellers some rental income in the meantime.

These are both signs of tough times...

Tax credits for organ donors, and medals

The issue of what compensation or reimbursement if any to allow for organ donation continues to be raised, very slowly, cautiously, and modestly in American legislation. The latest attempt, in the current (111th) Congress: Living Organ Donor Tax Credit Act of 2009 (Introduced in House), proposes

"In General- In the case of an individual who donates a qualified life-saving organ of such individual for transplantation into another individual during the taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year the sum of--
`(1) unreimbursed costs paid by the taxpayer in connection with such transplantation, and
`(2) any lost wages of the individual in connection with such transplantation.
`(b) Limitation- The credit allowed under subsection (a) with respect to any individual for any taxable year shall not exceed $5,000."


If this sounds excessively cautious, note that the previous (110th) Congress passed, and on October 14, 2008, President George W. Bush signed into law, the Stephanie Tubbs-Jones Congressional Gift of Life Medal Act (HR 7198) (Public Law No: 110-413). (It was passed without opposition in both houses of Congress). The Congressional Research Service summary of the law reads (emphasis added)

"10/14/2008--Public Law.
(This measure has not been amended since it was introduced. The summary of that version is repeated here.)
Stephanie Tubbs Jones Gift of Life Medal Act of 2008 - Makes any organ donor, or the family of any organ donor, eligible for a Stephanie Tubbs Jones Gift of Life Medal.
Requires the Secretary of Health and Human Services to direct the Organ Procurement and Transplantation Network to establish an application procedure, determine eligibility, and arrange for the presentation of medals.
Allows only one medal per family. Requires that such medal be presented to the donor or, in the case of a deceased donor, the family member who signed the consent form authorizing the organ donation.
Authorizes the Network to collect funds to offset expenditures relating to the issuance of medals.
Prohibits federal funds from being used to carry out this Act. "

The evolution of eBay

Once eBay was primarily an auction site...a story by Jeff Himmelman in the NY Times Sunday magazine brings us up to date: EBay’s Strategy for Taking On Amazon

"Most people think of eBay as an online auction house, the world’s biggest garage sale, which it has been for most of its life. But since Donahoe took over in 2008, he has slowly moved the company beyond auctions, developing technology partnerships with big retailers like Home Depot, Macy’s, Toys ‘‘R’’ Us and Target and expanding eBay’s online marketplace to include reliable, returnable goods at fixed prices. (Auctions currently represent just 30 percent of the purchases made at eBay.com; the site sells 13,000 cars a week through its mobile app alone, many at fixed prices.)

Under Donahoe, eBay has made 34 acquisitions over the last five years, most of them to provide the company and its retail partners with enhanced technology. EBay can help with the back end of websites, create interactive storefronts in real-world locations, streamline the electronic-payment process or help monitor inventory in real time. (Outsourcing some of the digital strategy and technological operations to eBay frees up companies to focus on what they presumably do best: Make and market their own products.) In select cities, eBay has also recently introduced eBay Now, an app that allows you to order goods from participating local vendors and have them delivered to your door in about an hour for a $5 fee. The company is betting its future on the idea that its interactive technology can turn shopping into a kind of entertainment, or at least make commerce something more than simply working through price-plus-shipping calculations. If eBay can get enough people into Dick’s Sporting Goods to try out a new set of golf clubs and then get them to buy those clubs in the store, instead of from Amazon, there’s a business model there.

A key element of eBay’s vision of the future is the digital wallet. On a basic level, having a ‘‘digital wallet’’ means paying with your phone, but it’s about a lot more than that; it’s as much a concept as a product. EBay bought PayPal in 2002, after PayPal established itself as a safe way to transfer money between people who didn’t know each other (thus facilitating eBay purchases). For the last several years, eBay has regarded digital payments through mobile devices as having the potential to change everything — to become, as David Marcus, PayPal’s president, puts it, ‘‘Money 3.0.’’'
...
"The best current example of the digital wallet’s promise, according to many in Silicon Valley, is Uber, a digital platform that connects riders and drivers. You enter your credit-card information into the Uber app once, and then every time you want to use it, the app knows where you are and shows you how many cars are nearby and how soon one can be available. You order with one touch on a mobile screen, and a text lets you know a driver is on the way and then another tells you when he’s near. He greets you by name, you tell him where you want to go and then, when you are dropped off, there is no further exchange — no tip, no receipt, no signing anything. The app takes care of all that for you. Uber didn’t change anything about the nature of cars or how they are driven. It just figured out how to use data and technology to make what was out there work much more efficiently. (EBay, through its acquisition of the company Shutl, has begun to exploit a similar inefficiency in the spare capacity of courier companies.)
...
"‘‘It’s not about payment,’’ Jack Dorsey, a founder of Square, a PayPal competitor, says. ‘‘It’s about identity. And it’s about the experience that a merchant can create, which is what actually builds loyalty. We believe that it’s important that the technology, the mechanics of payments, actually fade away to the background. They disappear completely.’’ After helping found Twitter in 2006, Dorsey became chief executive of Square in 2009. Its initial innovation was the Square Reader, a small device that plugs into the headphone jack of a smartphone or tablet and enables anyone, anywhere, to process a credit-card payment. (PayPal now has a similar reader.) In 2011, Square introduced what would become known as the Square Wallet, an app that links to a credit card (as Uber does) and allows consumers to pay either by holding their phones up to a scanner or, in some cases, simply by having the phones on in their pockets. Dorsey talks about how cool it is to get your coffee without having to do anything, but he also emphasizes what it means for the merchants. ‘‘The seller gets this very interesting tool,’’ he says. ‘‘They can recognize me when I walk in.’’ 

Compensating kidney donors: a call to action by Brooks and Cavanaugh in the LA Times

 Here's a clarion call for compensation of living kidney donors, from two nondirected kidney donors.  It's not the first, and very likely not the last, given the difficulty of modifying the existing law.  But it makes the case very clearly (and proposes that a tax credit spread over ten years might be the way to move foreward).

Opinion: A single reform that could save 100,000 lives immediately BY NED BROOKS AND ML CAVANAUGH, JULY 9, 2023 

"Never in the field of public legislation has so much been lost by so many to one law, as Churchill might’ve put it. The National Organ Transplant Act of 1984 created the framework for the organ transplant system in the United States, and nearly 40 years later, the law is responsible for millions of needless deaths and trillions of wasted dollars. The Transplant Act requires modification, immediately.

"We’ve got skin in this game. We both donated our kidneys to strangers. Ned donated to someone who turned out to be a young mother of two children in 2015, which started a chain that helped an additional two recipients. And Matt donated at Walter Reed in 2021, after which his kidney went to a Seattleite, kicking off a chain that helped seven more recipients, the last of whom was back at Walter Reed.

"Ned founded, and Matt now leads, an organization that represents nearly 1,000 living donors

...

"eight years ago, when Ned donated, the number of living kidney donors was 6,000. With all the work we’ve done since, the number of living donors is still about 6,000 annually. In the United States, nearly 786,000 people suffer from end-stage kidney disease, more people than can fit in the 10 largest NFL stadiums combined.

...

"More Americans die of kidney disease than of breast or prostate cancer, and one in three of us is at risk. This illness is widespread, but what makes it worse is the staggering financial burden borne by everyone. The head of the National Kidney Foundation testified in March that Medicare spends an estimated $136 billion, nearly 25% of its expenditures, on the care of people with a kidney disease. Of that, $50 billion is spent on people with end-stage kidney disease, on par with the entire U.S. Marine Corps budget.

...

"The National Organ Transplant Act prohibits compensating kidney donors, which is strange in that in American society, it’s common to pay for plasma, bone marrow, hair, sperm, eggs and even surrogate pregnancies. We already pay to create and sustain life

...

"The ethical concerns regarding compensation are straightforward. Nobody wants to coerce or compel those in desperate financial straits to do something they would not have done otherwise. The challenge, then — until artificial or nonhuman animal substitutes are viable options — is to devise a compensation model that doesn’t exploit donors.

"Compensation models have been proposed in the past. A National Institutes of Health study listed some of the possibilities, including direct payment, indirect payment, “in kind” payment (free health insurance, for example) or expanded reimbursements. After much review, we come down strongly in support of indirect payment, specifically, a $100,000 refundable federal tax credit. The tax credit would be uniformly applied over a period of 10 years, in the amount of $10,000 a year for those who qualify and then become donors.

"This kind of compensation is certainly not a quick-cash scheme that would incentivize an act of desperation. Nor does it commoditize human body parts. Going forward, kidney donation might become partly opportunistic rather than mostly altruistic, as it is now. But would it be exploitative? Not at all."

...

Ned Brooks and ML Cavanaugh are living kidney donors, and Brooks is the founder of the Coalition to Modify NOTA.

********

Here are all my posts that mention Ned Brooks, starting with this one:

Friday, February 26, 2016

A Freakonomics listener was inspired to become a non-directed kidney donor by the podcast on kidney exchange

Factoring

If you do a google search on "factoring," the first few organic results are on factoring numbers, but the ads are all about factoring receivables. Factors (in this sense of the word) are firms that lend cash to businesses, on the strength of their accounts receivable. It used to be (and still largely is) a relationship business; one factor would handle all of a firm's receivables.

The Street.Com has an article on the new face on the block, The Receivables Exchange , which is set up around the idea of letting firms borrow from individual investors on the strength of particular accounts receivable: Cash-Strapped Firms Sell Unpaid Accounts.

"Cash flow has become a leading concern for small firms as banks reduce credit lines, shorten maturities and raise rates, according to a May study by the Credit Research Foundation. Among the companies surveyed, 45% said the financial crisis was straining their access to working capital. Almost 70% reported a slowdown in customer payments, and 61% said their top priority was to boost cash flow by getting clients to pay what they owe faster.
The Receivables Exchange (TRE), which runs an online auction market for accounts receivable, is benefiting from these trends. More companies have been turning to the two-year-old firm to raise money as traditional credit sources dry up.
"We take the most liquid of the assets on the balance sheet that they can modify and allow those to trade on a transparent, standardized exchange," says Nicolas Perkin, president of the New Orleans-based company.
With TRE's online system, which one might describe as an eBay... for factoring, sellers post eligible receivables and set sale parameters, such as the duration of the auction, the minimum advance payment and the maximum fee they will pay.
Buyers, such as commercial banks and hedge funds, browse for accounts to bid on and post profiles indicating their preferences. Sellers can leave the auction open-ended or set a "buyout price" that allows a buyer to immediately snap up the accounts.

TRE has almost $20 billion of liquidity up for grabs. The average seller is looking to unload $65,000 of accounts receivable. The average auction lasts one day, with the shortest clocking in at less than a minute. The company has a 99% completion rate, with upwards of 85% selling at the buyout price. About 86% of users are repeat customers. "

I've written about TRE before, here and here.

Update: Steve Leider points me to this Marketplace Whiteboard video explaining Factoring, inspired by the recent troubles of CIT, a big factor.

Sally Satel on EconTalk, talking about organ donation (podcast)

PERMANENT LINK | JULY 24, 2017 Sally Satel on Organ Donation EconTalk Episode with Sally Satel Hosted by Russ Roberts	PRINTEMAIL  SHARE
You Are What You Eat...

Sally Satel, psychiatrist and resident scholar at the American Enterprise Institute, talks with EconTalk host Russ Roberts about the challenges of increasing the supply of donated organs for transplantation and ways that public policy might increase the supply. Satel, who has received two kidney donations, suggests a federal tax credit as a way to increase the supply of organs while saving the federal government money. She also discusses the ethical issues surrounding various forms of compensation for organ donors.

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Readings and Links related to this podcast episode

Related Readings HIDE READINGS

This week's guest: Sally Satel's Home page Sally Satel on Twitter. This week's focus: "The Kindest (Tax) Cut: A Federal Tax Credit for Organ Donations," by Sally Satel and Alan Viard. Tax Notes, June 12, 2017. PDF file. "A College Tuition Payment for Your Spare Kidney?," by Sally Satel. Slate, September 13, 2016. Additional ideas and people mentioned in this podcast episode: "Here's Looking at You, Kidney: How and why I became an organ donor -- and how I kept people from talking me out of it," by Virginia Postrel. Vpostrel.com, Texas Monthly, June 2006. "Desperately Seeking a Kidney," by Sally Satel. The New York Times, December 16, 2007. A few more readings and background resources: National Organ Transplant Act of 1984. Wikipedia. "Life-Saving Incentives: Consequences, Costs and Solutions to the Organ Shortage," by Alex Tabarrok. Library of Economics and Liberty, August 3, 2009. "How Free-Market Kidney Sales Can Save Lives--And Lower the Total Cost of Kidney Transplants," by Kathryn Shelton and Richard B. McKenzie. Library of Economics and Liberty, March 5, 2012. Health Care, by Michael A. Morrisey. Concise Encyclopedia of Economics. A few more EconTalk podcast episodes:  Virginia Postrel on Style. EconTalk. November 2006.  Tina Rosenberg on the Kidney Market in Iran. EconTalk. September 2015.  Alvin Roth on Matching Markets. EconTalk. July 2015.  Michael Munger on Exchange, Exploitation and Euvoluntary Transactions. EconTalk. June 2011.  The Economics of Organ Donations with Richard Epstein. EconTalk. June 2006.

Highlights

Time

Podcast Episode Highlights HIDE HIGHLIGHTS

0:33

Intro. [Recording date: July 6, 2017.] Russ Roberts: Sally Satel recently wrote an article with Alan Viard entitled "The Kindest (Tax) Cut: A Federal Tax Credit for Organ Donations," and that's going to be our topic for today.... So, you bring a special perspective to kidney donations. Talk about your personal story. Sally Satel: Yeah. I got a kidney in 2006; and then I got another kidney a year ago, almost a year ago today. And, when I got my first one it was sort of a surprise. A lot of people who know that they're going to need a kidney--well, by definition, they know that they're going to need a kidney. What I meant is that they have certain illnesses--they are either diabetic, or they've got lupus, severe hypertension that's been poorly managed for a while, high blood pressure. People know they are at risk for this, for kidney failure. But my case was sort of a surprise. I just went to the doctor for a regular checkup. This is the part of the story that scares everyone, because I felt completely fine. And during a routine blood draw, found out that I had--well, that I had kidney failure. Which is rather easy to diagnose. It's a test called a creatinine level. But when you go for a regular blood draw, a routine blood draw, that's one of the indexes they measure. So, they tested it again, and that was the same. So, the clock was ticking for me, because I knew from my medical training that if you have kidney failure, you need a new kidney, or you will languish on dialysis for years. And no matter how long you are on dialysis, your life will be prematurely shortened. I mean, people have lived for 20 years, even a little longer, on dialysis. Some people tolerate it better than others. That's a process where your blood is cleansed of toxins about 3 times a week for about 4 hours at a time; you go to a clinic. Most people feel very debilitated by it. The average person on dialysis can't hold a job. But some do. And, some people--it isn't as psychologically devastating to some folks. But others find it so distressing, they are actually--suicide is not that unusual. So, the idea of being tethered to that machine, while, granted, it would keep me alive. Now, if my liver had failed and I didn't get a transplant, that would be it. So, kidney dialysis does keep people alive for awhile. But it just seemed like a really, really half a life. So, I knew I needed a kidney, but I didn't know exactly when I would need dialysis. So, as I said, the clock started ticking. And it turned out I had a good year before the function got to the point where I really was becoming physically debilitated. But it was very hard finding a donor. And that's what kind of galvanized me, this whole issue of the shortage. But, just in terms of finding a donor, as I say, it was extremely difficult. It's not like every day you ask people for a body part. And I didn't have--I have a very tiny family. And, to make a long story short, none of them--I didn't feel I could ask any of them. And in fact I never really asked anyone. I would do it all differently if, heaven forbid, there is yet a third time I have to go through this--see, I'm very nice to my interns. But I would just talk about it with folks and wasn't even being coy. I just sort of thought magically, 'Oh, well some people will think of being a donor, and it will work out.' But it became pretty clear that it wasn't working out. And a lot of people actually said they would do it; and I appreciate that in that I know they wanted to be--I know they felt empathy for my situation; but in the end, basically, a lot of them got cold feet and backed out. And then you're in this terribly awkward position, because you really can't be angry. I mean it's an enormous thing to ask, and it would be incredibly presumptuous to have the expectation that they owed you anything. So, I was really getting very demoralized and about to get ready to go on dialysis. And, Virginia Postrel, who I knew, not very well, had been at a cocktail reception somewhere--this was in November of 2005--and she ran into a mutual friend and asked that friend how I was. And the friend said, 'Not so hot. She needs a kidney.' And, Virginia went--I think the next went to her computer--I remember the subject line; I still have a printout of her email--it said, 'Serious Offer.' And she said, 'So-and-so told me you needed a kidney, and if I match, I will do it.' And I think she followed up a few minutes later with another email: 'I won't back out.' And, so, she went through with it. This was March of 2006. And I'm almost as grateful to Steve, her husband, as to her, because that was one of the reasons that two of my friends, other of my friends who had seriously considered donating did not go through with it--because their spouse basically said, 'It's the kidney or a divorce.' [More to come. 6:48]

Ramesh Johari's course on Platform and Marketplace Design, starts tomorrow

Take the class, or you can also scroll down and see the syllabus with links to the papers.

MS&E 336: Platform and Marketplace Design

Course time

Tuesdays and Thursdays, 10:00-11:50 AM

Instructors

Ramesh Johari

Associate Professor

Management Science and Engineering

Electrical Engineering (by courtesy)

Huang Engineering Center, Room 311

E-mail: ramesh.johari@stanford.edu

Office hours: TBA, Huang 311

Additional office hours by appointment

Nick Arnosti (TA)

Management Science and Engineering

E-mail}: narnosti@stanford.edu

Office hours: TBA

Course website

The course website will be accessible through CourseWork.

Catalog course description

The last decade has witnessed a meteoric rise in the number of online markets and platforms competing with traditional mechanisms of trade. Examples of such markets include online marketplaces for goods, such as eBay; online dating markets; markets for shared resources, such as Lyft, Uber, and Airbnb; and online labor markets. We will review recent research that aims to both understand and design such markets. Emphasis on mathematical modeling and methodology, with a view towards preparing Ph.D. students for research in this area.

Detailed course description

Markets are an ancient institution for matching the supply for a good or service with its demand. Physical markets were typically slow to evolve, with simple institutions governing trade, and trading partners generally facing a daunting challenge in finding the “right” partner. The information technology revolution, however, has generated a sea of change in how markets function: now, markets are typically complex platforms, with a range of mechanisms involved in facilitating matches among participants.  Recent trends point to an unprecedented level of control over the design, implementation, and operation of markets: more than ever before, we are able to engineer the platforms governing transactions among market participants.  As a consequence, market operators or platforms can control a host of variables such as pricing, liquidity, visibility, information revelation, terms of trade, and transaction fees. The decisions made by the platform and the market participants interact, sometimes in intricate and subtle ways, to determine market outcomes.

This course is intended to prepare students for research on online and platform markets.  The course was inspired by the following observation: in the last decade, a wide range of graduates with quantitative backgrounds have been put into positions where they are effectively designing markets every day.  Often this is a side effect of being thrust into a software engineering, product development, or regulatory role: for example, a new hire might be asked to change how users browse through search results on eBay or Airbnb.  As is immediately apparent to a market designer, small changes to that basic infrastructure---the search engine---can radically alter the behavior of the market itself.  The goal in the class is to prepare students to be able to think conceptually about these market design challenges.

With that motivation in mind, we have three main goals for the quarter:

1. Problems.  The first goal is to use the quarter to identify open research directions that have risen to the forefront with the rise of online platforms.  We live in an exciting time for market design, with great interest in the fundamentals, as well as a rich set of applications that motivate research directions, and provide data and testbeds for validation.  A key emphasis in this part of the class is to focus on “levers” that affect the information that market participants obtain about each other in a variety of ways.
2. Tools. The second goal is to ensure students have access to a basic set of tools with which to reason about such markets.  The course assumes students have already had prior exposure to game theory and economic modeling.  In this course, we will focus on a set of tools that have specifically proven helpful in studying platform markets, and the effects of design interventions on these markets.  A key emphasis is on large market models.
3. Applications.  Along the way, we hope to learn about how the research questions we identify and the tools we learn are relevant to specific marketplaces.  This will be through a mix of mathematical modeling, empirical research, as well as anecdotal evidence.

The course will be taught using a mix of lecture format and seminar-style guided discussion. Much of what we will discuss is active research, so the reading material will be drawn from relevant papers in the literature; this material will be available from the course website. The focus will be on encouraging discussion of both open theoretical questions and modeling issues. This is particularly important since the course content draws from a range of disciplines (operations research, computer science, economics, etc.). The course should provide a unique forum for a lively exchange of ideas across these boundaries.

Evaluation

Your grade in the course will be based on two components.

1. Participation in lecture [ 40% of course grade ]. You will be expected to read papers and actively participate in lectures.  To help make sure this happens, for at least four of the weeks of the quarter, you will have to choose one paper that you need to read and prepare a “mini-review”.  The mini-review consists of answers to the following three questions, in 100 words or less each:
1. What is the paper about?
2. What are the strengths of the paper?
3. What are the weaknesses of the paper?

Each mini-review will be graded credit/no-credit, i.e., you will receive full credit for this

component if you satisfactorily complete each mini-review.

2. Course project [ 60% of course grade ]. A course project is the main evaluation component of the class.  The course project is meant to get you thinking actively about research problems in the market design problems represented by the course material.  The project will culminate in a presentation to your fellow students, and a written report (due by March 20, 2015).
   I will distribute more details on the project in the first week of lecture.

Course outline

Note: The content described on the course outline below will take up the first 14 lectures of the quarter.  (This is why each lecture is 110 minutes, instead of the usual 75 minutes.)  The remainder of the quarter will be used for guest speakers and discussion and presentation of course projects.

Part 1 (2 lectures): Introduction to platforms

We introduce platforms, and cover some of the relevant economics literature that defines and analyzes two-sided platforms.

Topics of interest:

1. What is a (two-sided) platform?
2. What is the objective of the platform operator,
   what information does she possess, and
   what tools does she have to acheive these objectives?
3. What are the objectives of platform participants,
   what information do they possess,
   and what actions are available to them?

Papers:

1. Rochet and Tirole (2003), Platform competition in two-sided markets
2. Rochet and Tirole (2006), Two-sided markets: A progress report
3. Armstrong (2006), Competition in two-sided markets
4. Caillaud and Jullien (2003), Chicken & egg: Competition among intermediation service providers
5. Parker and van Alstyne (2005), Two-sided network effects: A theory of information product design

Part 2 (2 lectures): Operational details of platforms -- pricing

We consider what the introductory papers might have missed, focusing on pricing strategies.  The emphasis is on operational details of platform behavior.

Topics of interest:

1. Pricing usage
1. Membership fees and subscriptions
2. Usage-based fee with flat fee per transaction/match
3. Usage-based fee with volume-based fee per transaction/match
2. Pricing visibility: paying for preferential access to the other side of the market
3. Pricing transaction risk: paying for reduced uncertainty of trade

Papers:

1. Gomes and Pavan, Many-to-Many Matching and Price Discrimination
2. Einav, Faronato, Levin, Sundaresan, Sales mechanisms in online markets: What happened to Internet auctions?
3. Celis, Lewis, Mobius, Nazerzadeh, Buy-it-Now or Take-a-Chance: Price Discrimination through Randomized Auctions

Part 3 (3 lectures): Operational details of platforms -- reputation and feedback

We study the role of reputation systems used by online platforms to help participants judge trading partners they have never met.

Topics of interest:

1. Examples of reputation and feedback systems
2. What incentives do particular systems provide to market participants?
3. How do we design systems that incentivize honest feedback?
4. How should the platform use the feedback system as a “lever” to improve market performance?

Papers:

1. Resnick, Kuwabara, Zeckhauser, Friedman (2000), Reputation systems
2. Cabral and Hortacsu (2010), The dynamics of seller reputation: Evidence from eBay
3. Dellarocas and Wood (2007), The Sound of Silence in Online Feedback: Estimating Trading Risks in the Presence of Reporting Bias
4. Bolton, Greiner, and Ockenfels (2013), Engineering Trust: Reciprocity in the Production of Reputation Information
5. Horton and Golden, Reputation Inflation in an Online Market
6. Fradkin, Grewal, Holtz, Pearson, Bias and Reciprocity in Online Reviews: Evidence from Field Experiments on Airbnb
7. Nosko and Tadelis, The Limits of Reputation in Platform Markets: An Empirical Analysis and Field Experiment

Part 4 (3 lectures): Operational details of platforms -- search

We discuss how the platform can mediate matches by directing the search effort of each side of the market.

Topics of interest:

1. How do market participants cope with the search frictions of finding trading partners?
2. What information should the platform share with market participants about potential matches?
3. What mechanisms can the platform provide to participants to improve the signals they send each other?

Papers:

1. Coles et al. (2010), The job market for new economists: A market design perspective
2. Lee, Niederle, Kim, Kim, Propose with a rose? Signaling in Internet dating markets
3. Halaburda and Piskorski, Competing by Restricting Choice: The Case of Search Platforms
4. Arnosti, Johari, and Kanoria, Managing Congestion in Dynamic Matching Markets
5. Tadelis and Zettelmeyer, Information Disclosure as a Matching Mechanism: Theory and Evidence From a Field Experiment
6. Horton and Johari, At What Quality and What Price? Inducing Separating Equilibria as a Market Design Problem

Part 5 (4 lectures): Modeling tools

In this part of the course we will cover some tools that have proven helpful in modeling and analyzing operational aspects of two-sided platforms.  We emphasize the use of large market models.

Topics of interest:

1. Large market models of static markets
1. Directed search and decentralized matching
2. Double auctions
2. Large market models of dynamic markets
1. Repeated (dynamic) auctions
2. Dynamic matching models

Papers of interest:

1. Rogerson, Shimer, Wright, Search-theoretic models of the labor market: A survey
2. Burdett, Shi, Wright (2001), Pricing and Matching with Frictions
3. Eeckhout and Kircher (2010), Sorting and decentralized price competition
4. Iyer, Johari, Sundararajan, Mean field equilibria of dynamic auctions with learning
5. Bodoh-Creed, Optimal Platform Fees for Large Dynamic Matching Markets
6. Besbes, Balseiro, Weintraub, Repeated Auctions with Budgets in Ad Exchanges: Approximations and Design
7. Duffie, Malamud, Manso, Information percolation with equilibrium search dynamics
8. Arnosti, Johari, and Kanoria, Managing Congestion in Dynamic Matching Markets