Wednesday, January 1, 2014

Cornes and Neto celebrate Gale and Shapley, and the practical value of good theory

Here's a paper that points out that there's nothing more practical--even for policy--than good theory, and that it might be hard to guess where that will come from.

I was struck not just by the title of the paper, but by the parenthetical comment in the first sentence of the abstract...

Is Policy Too Important to be Left to Empiricists? Lessons of the 2012 Nobel Prize in Economics
Richard Cornes and José A. Rodrigues-Neto

Fifty years ago, a paper entitled ‘College Admissions and the Stability of Marriage’was published in a somewhat obscure journal, the American Mathematical Monthly (currently a ‘B’ journal, according to the Australian Business Deans Council). The research program and policy developments that have flowed from that abstract and apparently slight seven-page paper recently led to the award of  the 2012 Nobel Prize for Economics to one of its authors, Lloyd Shapley. (Shapley’s co-author, David Gale, died in 2008.) Shapley shared the Nobel Prize ‘for the theory of stable allocations and the practice of market design’ with US economist Alvin Roth, who has been responsible for much of the applied work that has built on Gale and Shapley’s insights. The history of the path leading from the abstract Gale/Shapley insights to the design of resource allocation mechanisms in 2012 is a fascinating and instructive one for many reasons. This article tries to give the reader an idea of what this literature is about, and of the many ways in which Matching Theory has led to real improvements in the design of operational resource-allocation mechanisms.

The article makes some points about how funny sounding theory can turn into practical institutions that were also made in the recent Golden Goose awards (see this post and this one).

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