How Market Design Emerged from Game Theory, by Roth and Wilson in the JEP

This paper was quite fun to collaborate on, with my dissertation advisor Bob Wilson...

How Market Design Emerged from Game Theory: A Mutual Interview
Alvin E. Roth and Robert B. Wilson
Journal of Economic Perspectives—Volume 33, Number 3—Summer 2019—Pages 118–143

Abstract
"We interview each other about how game theory and mechanism design evolved into practical market design. When we learned game theory, games were modeled either in terms of the strategies available to the players ("noncooperative games") or the outcomes attainable by coalitions ("cooperative games"), and these were viewed as models for different kinds of games. The model itself was viewed as a mathematical object that could be examined in its entirety. Market design, however, has come to view these models as complementary approaches for examining different ways marketplaces operate within their economic environment. Because that environment can be complex, there will be unobservable aspects of the game. Mathematical models themselves play a less heroic, stand-alone role in market design than in the theoretical mechanism design literature. Other kinds of investigation, communication, and persuasion are important in crafting a workable design and helping it to be adopted, implemented, maintained, and adapted."

**********
It turns out that some people read footnotes .  I got the following welcome email from Charlie Nathanson at Northwestern, expanding on one of mine (in which I reflected on writing a paper with Bob):

"I was delighted to see your reference to the Talmud in your JEP article that came out today (footnote 22). There is a verse from Pirkei Avot about the student/teacher relationship that I did not see in your footnote or in your linked blog post. In case you haven't come across it, I wanted to share it with you. It's chapter 4, verse 12 (https://www.sefaria.org/Pirkei_Avot.4.12):
רַבִּי אֶלְעָזָר בֶּן שַׁמּוּעַ אוֹמֵר, יְהִי כְבוֹד תַּלְמִידְךָ חָבִיב עָלֶיךָ כְּשֶׁלְּךָ, וּכְבוֹד חֲבֵרְךָ כְּמוֹרָא רַבְּךָ, וּמוֹרָא רַבְּךָ כְּמוֹרָא שָׁמָיִם:
Rabbi Elazar ben Shammua said: let the honor of your student be as dear to you as your own, and the honor of your colleague as the reverence for your teacher, and the reverence for your teacher as the reverence of heaven. 

Best wishes,
Charlie"

*********
And here's the footnote that prompted that email:

22 A brief account of our subsequent teacher–student interactions, along with some other remembrances related  to  the  present  essay,  is  included  in  my  intellectual  autobiography  at  the  Nobel  Prize  website:  https://www.nobelprize.org/prizes/economics/2012/roth/auto-biography/.   The   rabbinic   literature   does  not  overlook  teacher–student  relations.  In  the  Talmud,  for  example,  one  is  enjoined:  “Provide  for yourself a teacher and get yourself a friend ...” See my related blog post for more on this: https://marketdesigner.blogspot.com/2013/06/notes-on-teachers-and-students-from.html. The martial arts also value teacher–student relations, and I benefited from that too, as I describe at https://marketdesigner.blogspot.com/2013/06/honorary-7th-dan-black-belt-in-jka.html. 

How much do Kidney Exchanges Improve Patient Outcomes? Keith Teltser in AEJ-Policy

Do Kidney Exchanges Improve Patient Outcomes?
By Keith F. Teltser
American Economic Journal: Economic Policy 2019, 11(3): 427–453
https://doi.org/10.1257/pol.20170678

Abstract: "In this paper, I estimate the number of additional transplants generated by kidney exchanges. To do this, I analyze substitution patterns between exchange transplants and other transplant outcomes. Exploiting variation in patients exposure to exchange activity across time and place, I find that 64 percent of exchange transplants represent new living donor transplants. Using the same approach, I find that an increase in the probability of receiving an exchange transplant reduces the probability of graft failure and reduces time spent waiting for a kidney. Back-of-the-envelope calculations suggest that each exchange transplant increases social welfare by $300,000 to $700,000"

Mark Kleiman (1951-2019)

From the NY Times:
Mark Kleiman, Who Fought to Lift Ban on Marijuana, Dies at 68
"Kelly Kleiman, his sister and only immediate survivor, said the cause was lymphoma and complications of a kidney transplant he received from her in April.
...
"Beginning in the mid-1980s, Professor Kleiman was best known for what was then a cry in the wilderness: a thesis that wars on drugs waged on the basis of enforcement had failed; that alcohol does more harm than cannabis; and that the cost of banning marijuana altogether outweighed any of the benefits of prohibition. At the same time, he warned that complete legalization remained a high-risk gamble."

From Reason magazine

RIP Mark Kleiman, Who Brought Rigor, Dispassion, and Candor to a Frequently Overheated Drug Policy Debate
The widely quoted and consulted academic died yesterday at the age of 68.
JACOB SULLUM | 7.22.2019 12:50 PM

"Back in 1989, Mark Kleiman published a book, Marijuana: Costs of Abuse, Costs of Control, that exemplified his calm, methodical, just-the-facts approach to drug policy. Kleiman argued that federal efforts to curtail cannabis consumption were ineffective and diverted resources from programs that had a better public safety payoff. Three years later, in Against Excess: Drug Policy for Results, he came out in favor of legalizing marijuana, arguing that the costs of prohibition outweighed its benefits. At a time when three-quarters of Americans still supported marijuana prohibition, Kleiman's position was striking, especially coming from a widely quoted and consulted academic who had the ear of policy makers."
*********

From The Intercept:
Remembering Mark Kleiman, a Relentlessly Thoughtful Scholar of Drug Policy, by Maia Szalavitz

"As an opponent of drug war dogma, he was willing to explore alternative approaches to punishment, rather than argue for it to be abolished entirely. That’s a sharp departure from much of the left, which has often been content to firmly oppose the moral stain that is mass incarceration without seriously grappling with what alternative policies might look like. At its best, Kleiman’s work and teachings made people on all sides think much more deeply about their positions, regardless of where they ultimately came down.

"Kleiman supported going after drug dealers, but selectively targeting only the most violent and disruptive, to avoid, essentially, creating evolutionary pressure in markets that would favor the most ruthless and cause the most harm."
**********

From the National Review:

Mark Kleiman Was the Nation’s Greatest Thinker on Drug Policy

By GABRIEL ROSSMAN

"As expressed in its most programmatic form in Against Excess, Kleiman applied rigorous economic logic, but with the curious inversion that the markets he studied have severe externalities and ruin the lives of their most devoted consumers. Market failure and high transaction costs are policy successes when the commodity is poison, and so good policy means encouraging bad market design. For instance, Kleiman favored a noncommercial approach to marijuana decriminalization precisely because he expected nonprofit or state-operated dispensaries to be less efficient than for-profit firms, and in particular less likely to grow the user base through advertising and make intense use more convenient. The billboards advertising dispensaries, and even marijuana delivery, that saturate Los Angeles are exactly what Kleiman thought sensible decriminalization should avoid.

"But just as good market design has to be careful, so does deliberately bad market design. A major argument in Against Excess is that if you make selling drugs risky by locking up drug dealers (or encouraging them to shoot each other over territory), you build in a risk premium to the price, which draws in suppliers who don’t mind risk. The better approach is to create a deadweight loss so you don’t encourage more supply. For illegal drugs, make it a time-consuming hassle to score. For legal drugs like tobacco and alcohol, impose stiff excise taxes. In both cases the consumer faces costs that do not benefit, and therefore encourage, sellers. These costs might not discourage addicts in the short run, but long-run demand is relatively “elastic”: Increased costs from hassle or taxes can discourage potential users from starting and encourage existing addicts to quit.

"A curious consequence of Kleiman’s logic is that he consistently preferred an emphasis on retail markets rather than high-level distributors or source-country trafficking. His reasoning was that street prices substantially reflect retail markup. In the United States and most European countries, retail markup is about half of the purity-adjusted street price for cocaine and heroin, and the domestic wholesale price itself is about five to ten times higher than the wholesale price in source countries. Source-country interdiction efforts do increase wholesale prices, but this has little effect on retail prices and destabilizes countries. For instance, if you have read Killing Pablo or seen Narcos, you know about the escalation of the dirty war against the Medellin cartel by American intelligence and the Colombian National Police in the early 1990s, but this bloodbath had only a trivial and short-lived impact on retail cocaine prices in the United States, which is still cheaper than it was in the crack era."

Speed bumps for high frequency trading

From the WSJ:

More Exchanges Add ‘Speed Bumps,’ Defying High-Frequency Traders
Over a dozen financial markets plan mechanisms that impose a split-second delay before executing trades  by By Alexander Osipovich.

"By 2020, more than a dozen markets in stocks, futures and currencies from Toronto to New York to Moscow will slow down trading via speed bumps or similar features, if all the current planned launches are carried out. Five years ago, only a few markets had speed bumps.
...
"Among the exchanges set to debut their first speed bumps are the London Metal Exchange, which plans to add an eight-millisecond delay to gold and silver futures later this year. Chicago-based Cboe Global Markets hopes to add a speed bump on its EDGA stock exchange in 2020, if it wins regulatory approval.

"LME, Cboe and other markets adopting speed bumps say they want to neutralize “latency arbitrage,” a strategy in which a fast trader takes advantage of a moving price before other players can react.
...
"Cboe’s proposal would force the HFT firm to wait four milliseconds before buying the Ford shares. But the same delay wouldn’t apply if the investor sent Cboe an electronic message canceling his or her $10.00 sell order. That gives the investor a brief window of time to avoid being picked off by the faster trade.

"Most of the latest speed-bump plans have a similar, “asymmetrical” design, meaning they don’t apply equally to all trades. Such speed bumps are typically meant to favor players who publicly quote prices on an exchange, rather than those who attempt to buy or sell using those prices."

Operational experience of kidney exchange with the Alliance for Paired Donation (APD)

Like having children, the hard work of market design doesn't end at conception, or even at birth, it's an ongoing process, particularly when it has to interact with the day to day operating procedures (excuse the double entendre) of the participants.

Here's a paper that reports results of some of that experience with the innovative kidney exchange network that began life as the Alliance for Paired Donation (APD), and is now called the Alliance for Paired Kidney Donation (APKD):

The 6‐year clinical outcomes for patients registered in a multiregional United States Kidney Paired Donation program ‐ a retrospective study
Stanislaw M. Stepkowski  Beata Mierzejewska  David Fumo  Dulat Bekbolsynov Sadik Khuder  Caitlin E. Baum  Robert J. Brunner  Jonathan E. Kopke  Susan E. Rees Connie Smith  Itai Ashlagi  Alvin E. Roth  Michael A. Rees
Transplant International, 2019, Volume 32, Issue 8, 839-853.

"Summary

We examined what happened during a 6‐year period to 1121 end‐stage renal disease patients who registered with their willing/incompatible living donors for kidney exchanges with the Alliance for Paired Donation (APD). Of all patients, 65% were transplanted: 37% in kidney paired donation (APD‐KPD, APD‐other‐KPD); 10% with compatible live donors (APD‐LD); and 18% with deceased donors (APD‐DD). The remaining patients were withdrawn (sick/died/others; 15%), or were still waiting (20%). For those patients with a cPRA 0–94%, 72% received a transplant. In contrast, only 49% of very highly sensitized (VHS; cPRA 95–100%) were transplanted. Of the VHS patients, 50% were transplanted by KPD/APD‐LD while 50% benefited through prioritization of deceased donors in the modified kidney allocation system (KAS introduced in 2014). All APD transplanted groups had similar death‐censored 4‐year graft survivals as their relevant Organ Procurement and Transplantation Network (OPTN) groups. It is noteworthy that VHS graft and patient survival results were comparable to less sensitized and nonsensitized patients. All patients should be encouraged to search for compatible donors through different options. Expanding the donor pool through KPD and the new KAS of the OPTN increases the likelihood of transplantation for VHS patients.

Sperm selection

I've blogged before about selection of sperm donors, but here's a story from the NY Times about the selection of sperm itself:

Tinder for Sperm: Even in the Petri Dish, Looks and Athleticism Are Prized
What makes one sperm cell — a blob of DNA with a tail — stand out? The selection process is like a microscopic Mr. America contest.
By Randi Hutter Epstein

“Not that one with the droopy head,” Lo said, pointing to a sperm that looked like a deflated balloon sagging over its string. He rejected a sperm with a thickened midpiece that he described as a “turtleneck,” and said he also avoids sperm with curlicue tails or an extra tail. Slow pokes and non-swimmers are spurned as well.

...
"When a sperm cell reaches the egg, it releases hyaluronidase, an enzyme that dissolves the cumulus, a layer of cells surrounding the egg. Next, the acrosome, a vesicle inside the sperm cell’s head, fuses with the outer layer of the egg, igniting the release of enzymes that ease the route inside. The sperm’s vigorously waving tail provides an extra push to help it through. Once inside, proteins within the sperm cell’s head prompt the oocyte to finish maturing and to release chemicals that harden the outer shell of the egg, preventing other sperm from barging in.

"These days, many leading fertility centers use techniques that allow them to bypass all these steps. Instead, they pick a single sperm and inject it into the egg, a technique called intracytoplasmic sperm injection or ICSI (pronounced ICK-see). ICSI was designed to help men with few or defective sperm, but has become so common that it’s used in more than half* of all I.V.F. procedures.
...
"In addition to having a keen eye for promising sperm, an embryologist must have excellent hand-eye coordination. Even then, learning to identify and successfully catch a single sperm before it swims away can take months of practice, said Lo. “I told my parents those years of video game playing, they’ve really paid off.”

* From The Lancet: "Globally, between 2008 and 2010, more than 4·7 million treatment cycles of assisted reproduction techniques were performed, of which around half involved intracytoplasmic sperm injection (ICSI), leading to the birth of 1·14 million babies.

Compensation of kidney donors in Chile: an estimate of benefits

A look into a possible future, from the December 2019 issue of the Latin American Economic Review:

An analysis of economic incentives to encourage organ donation: evidence from Chile
Parada-Contzen, M. & Vásquez-Lavín, F. Lat Am Econ Rev (2019) 28: 6. https://doi.org/10.1186/s40503-019-0068-2

Abstract
We perform a cost–benefit analysis on the introduction of monetary incentives for living kidney donations by estimating the compensation that would make an individual indifferent between donating and not donating a kidney while alive using Chilean data. We find that monetary incentives of US$12,000 save US$38,000 to health care system per donor and up to US$169,871 when we consider the gains in quality of life of receiving an organ. As one allows the incentives to vary depending on the individual position on the wage distribution, the compensation ranges from US$4214 to US$83,953. Importantly, introducing payments to living donors payable by a third party helps patients who currently may not have access to necessary medical treatment. Therefore, exclusions in access for organs due to the monetary constraints can be prevented.

Removing disincentives to kidney donation, by McCormick et al. in J.Am.Soc.Nephrology

Here's the latest paper in an illuminating series on the costs and consequences of kidney donation and transplantation:

McCormick F, Held PJ, Chertow G, Peters T, and Roberts J.  Removing Disincentives to Kidney Donation: A Quantitative Analysis.  J Am Soc Nephrol 30: ccc–ccc, 2019. doi: https://doi.org/10.1681/ASN.2019030242 is:

https://jasn.asnjournals.org/content/jnephrol/early/2019/07/23/ASN.2019030242.full.pdf

I'm fortunate to be on McCormick's distribution list for email updates on matters related to kidney transplantation, and here's how he introduced and summarized this paper (the table of cost estimates is at the very bottom):

"Friends,

About two years ago, Economics Nobel Laureate Alvin Roth observed that since no-one in the transplant community seemed to be opposed to removing disincentives to kidney donation, the community should unite behind accomplishing that goal.  Our just-published article -- “Removing Disincentives to Kidney Donation: A Quantitative Analysis” -- lays out the consequences of pursuing that consensus objective.  It identifies seven disincentives facing living kidney donors and a single disincentive facing the families of deceased donors. 

The seven disincentives to living donors are listed in column 1 of the table below.  Columns 2 - 5 show estimates of the magnitudes of some of these disincentives made by earlier researchers.  Column 6 indicates our own best estimates of all of the disincentives, and Column 7 specifies the government actions needed to remove these disincentives without violating the National Organ Transplant Act.

Note that the disincentives to living donors total almost $38,000, which is much larger than generally assumed.  This is a substantial deterrent to kidney donation by living donors and goes a long way toward explaining why, even though about 125,400 patients were diagnosed with kidney failure in the U.S. in 2017, most of whom could have benefited from a kidney transplant, only 5,811 patients (4.6%) received a kidney from a living donor.

It follows that if the government could remove all of these disincentives by compensating donors, it could substantially boost kidney donations.  We estimate total donations from both living and deceased donors would increase by about 12,500 per year (63%).  That would cut the waiting list for transplant kidneys (currently numbering about 93,000 patients) in half in about four years.

We estimate removing all the disincentives would require an initial government outlay of only about $0.5 billion per year.  But this investment would quickly be recovered because (a) the long-run cost of transplantation is much less than for dialysis and (b) the government pays most of the costs of both.  So taxpayers would wind up saving a net $1.3 billion each year.  Much more importantly, society would enjoy a net welfare gain of about $14 billion per year, reflecting the great value of the additional donated kidneys to recipients and the savings from these recipients no longer needing expensive dialysis therapy. 

The timing of this article is fortuitous because there is currently great interest in Washington in proposals to remove disincentives to organ donation.  Indeed, on July 10, President Trump issued an executive order stating: “Within 90 days of the date of this order, the Secretary [of the Department of Health and Human Services] shall propose a regulation to remove financial barriers to living organ donation.”

               

Frank

The URL for the just published article: McCormick F, Held PJ, Chertow G, Peters T, and Roberts J.  Removing Disincentives to Kidney Donation: A Quantitative Analysis.  J Am Soc Nephrol 30: ccc–ccc, 2019. doi: https://doi.org/10.1681/ASN.2019030242 is:

https://jasn.asnjournals.org/content/jnephrol/early/2019/07/23/ASN.2019030242.full.pdf

This is the fourth in a series of articles aimed at reducing the kidney shortage and thereby saving tens of thousands of lives each year.  The previous three were:

1.             Held PJ, McCormick F, Ojo A, Roberts JP.  A cost-benefit analysis of government compensation of kidney donors.  Am J Transplant 16: 877–885, 2016.         

This article laid out in great detail (13 Supplements) all of the costs and benefits of compensating kidney donors, showing it would confer a net benefit on society of about $46 billion per year and would save taxpayers about $12 billion per year.

https://onlinelibrary.wiley.com/doi/full/10.1111/ajt.13490

2.       Held PJ, McCormick F, Chertow GM, Peters TG, Roberts JP.  Would government compensation of living kidney donors exploit the poor? An empirical analysis.  PLOS ONE, November 28, 2018. 

This article presented evidence that the poor would not be exploited by government compensation of kidney donors.  Indeed, the aggregate net benefit to the poor would increase to $12 billion per year from only $1 billion per year currently.

https://journals.plos.org/plosone/article/file?id=10.1371/journal.pone.0205655&type=printable

 

 

3.       McCormick F, Held PJ, Chertow GM.  The Terrible Toll of the Kidney Shortage.   J Am Soc Nephrol 29: 2775–2776, 2018.

This editorial argued that the shortage of transplant kidneys is causing the needless premature deaths of about 43,000 Americans each year (118 per day), the same death toll as from 85 fully loaded 747s crashing each year.  This is a much larger number than had previously been assumed. 

 https://jasn.asnjournals.org/content/jnephrol/29/12/2775.full.pdf

Table 1 Disincentives to Kidney Donation Facing Living Donors
(1) Disincentive		Estimated Magnitudes of Disincentives (Adjusted to U.S. prices and standard of living in 2017)					(7) Proposed Government Action To Remove  the Disincentive
		(2) Gaston          et al.      (2006)	(3) Becker – Elías  (2007)	(4) Rodrigue  et al.    (2016)	(5) Przech  et al.    (2018)	(6) McCormick – Held  et al.  (this study)
1	Travel to, and lodging near, a transplant center	$4,313	--	$1,945	$1,653	$3,122	Expand current NLDAC program to include donors of all income levels
2	Loss of income while recovering from surgery		$3,631	$5,118	$4,368	$5,118	Expand current NLDAC pilot program to include donors of all income levels, providing donors with a tax credit of $5,000
3	Cost of home/ dependent care	--	--	--	$5,592	$5,592	Include cost of home/ dependent care in NLDAC program, providing donors with a tax credit of $6,000
4	Risk of dying during kidney removal	$2,951	$6,723	--	--	$1,860	Provide donors with a $5 million short-term life insurance policy
5	Pain and discomfort of kidney removal	$6,414	--	--	--	$6,414	Provide donors with a tax credit of $6,500
6	Decrease in the long-term quality of life	$23,250	$10,085	--	--	$7,910	Provide donors with an insurance policy covering death, disability, and long-term health problems due to donation
7	Concern that a relative or close friend may need a kidney in the future	--	--	--	--	$7,728	Promise to provide a kidney in the future for a specific person in exchange for a donation now
Total		$36,928	$20,439	--	--	$37,745