Alvin E. Roth | Who Gets What and Why?

okay thank you everyone for being here uh I'm going to just briefly introduce our speaker for today Al Roth who's the Craig and Susan McCall professor of

Economics at Stanford and the gun professor of economics and business administration Emeritus at Harvard he works in the areas of Game Theory

experimental economics and Market design and shared the 2012 Nobel Memorial prize in economics I believe with Lloyd shapley who recently passed away

um Forbes has sometimes referred to Al as representing unfreakonomics because in contrast to for example uh the authors of of books like Freakonomics

who uh according to Forbes are fascinated by obscure but intriguing questions like how to detect cheating by sumo wrestlers Roth relish's real world challenges those real world challenges

include designing the medical residency matching program the Boston and New York school choice systems and the kidney matching algorithms used in kidney exchange programs and Al is here with us

today to discuss his work and his new book who gets what and why here it is also available in an audible version uh so please welcome Al Roth

um is this microphone live can you hear me no all right okay uh I'll try to be here then can you hear me now so I'm delighted to be here thank you Kim um

I want to talk to you today about markets and maybe expand your idea of what markets are uh as Kim mentioned I I just wrote a book it came out in June and one of the nice things about

this time of year for for having written a book is is this is the time when the translations start to come out and that's sort of fun because uh markets and languages have a lot in common

they're both ancient human artifacts there they're things that people make um and just like there are many natural languages just as there are many languages there are lots of different

kinds of markets and marketplaces and I think that when when most people think about markets we tend to think about commodity markets and I'm going to talk

today mostly about markets that are not commodity markets but let's think for a moment about commodity markets and what makes them so interesting and simple and and iconic when you're buying shares of a company

on the New York Stock Exchange you don't care who you're dealing with uh you don't worry about whether they've taken good care of those shares while they had them and they don't worry about whether you're going to take good care of those

shares uh only the price matters the job of the New York Stock Exchange is price Discovery to discover the prices at which Supply equals demand at every moment during the day for each of the

financial Commodities that are being sold but not all markets work that way um in lots of markets you care who you're dealing with and prices may be

important but they don't do all the work and in some of the markets I'll tell you about like like kidney exchange and school choice we don't really let prices do any of the work

so think about college admissions Duke doesn't fill its entering class by raising tuition until Supply equals demand and just enough students would

like to study at Duke to fill the classes it's expensive to go to Duke but it's cheap enough that lots of people would like to study here and so the market has has other market clearing

institutions there are application processes there are essays and interviews and Admissions and you can't come to Duke um unless you've been admitted

and matching markets in general are markets that are like that markets where you can't simply choose what you want even if you can afford it but you also have to be chosen so College admission

you have to be admitted in labor markets you can't just show up and work at Google you have to be hired and similarly Google can't just decide that you'll come to work at Google they have

to compete with with Facebook and Airbnb so so these are our matching markets and some of the most important markets in our lives are matching markets where we

go to school what jobs we get who we marry and and college admissions and labor markets have something in common with marriage you can't just choose your

spouse you also have to be chosen so um so the the matching markets that that we engage in have to have other institutions that it let us identify not

just prices but individuals with whom we want to transact so let's think a little bit about what marketplaces have to do in general and

often you know the field that I work in has come to be called Market design a better name might be Marketplace design right because uh marketplaces are the

places where markets happen and that's where rules uh are applied and things like that but marketplaces have to perform a number of tasks in order to

help a market work successfully and let me tell you what I think are quite General tasks that marketplaces have to do but use Airbnb as my example so that that we can make it concrete

so the first thing a Marketplace has to do is it has to help the market become thick it has to bring together a lot of people who want to transact with each other so that it becomes a good place to

look for transactions so Airbnb started as a website in San Francisco and one of the ways they got thickness is they started buying up their their competitors for instance crash patter

was a very similar website in England and by buying crash pattern Airbnb began to be able to offer uh places to stay in San Francisco to

Travelers who originated in England and offer places to stay in England to Travelers who originated in San Francisco and that made the market thicker on both sides they they had more

Travelers and more hosts now one of the uh as Airbnb became successful that they created a thick market and their

competitors stopped being other websites but started to be giant hotel companies like like Hilton Hotels and one of the problems that come with thickness is you have to deal with

congestion right so when the market is thick when there are lots of us in the marketplace looking to transact with each other it might be hard for us to find each other just because there are so many of us so one of the jobs of a

Marketplace is to make that easier and to understand the the problem that Airbnb had had to solve and has largely solved think about Hilton Hotels their

their current competitors you know along with other Hotel companies um think about how hard it would be to get a room at a Hilton hotel if you could

only inquire about one room at a time right and that's sort of the situation that many Airbnb uh Apartments have many

of them many Airbnb hosts just preside over one property so supposing you called up Hilton Hotels and you said I want to stay in San Francisco next

Friday have you got have you got a room and the receptionist would say to you well which which room would you like and you'd say well how about room 528 say

I'm so sorry room 528 is is full next Friday and then she'd hang up and you'd have to call again and say so how about room 527 and they'd you know you might have to go through several phone calls

before you could get a room if one was available that's a little bit the Airbnb story and when they started uh their website their initial Market design was that if I wanted to rent a room in my

house and you wanted to uh to book it you would indicate on the web that you wanted to book the room and and maybe when I came home at the end of the day I would find

that at six people wanted to book my room and I could only give it to one of them um so I would give it to you maybe because you were the first to apply for it but then I would have to tell five

people sorry room 528 is unavailable and they would have to try to find another room uh so to deal with that wasn't a big problem when there weren't that many rooms and that many Travelers but as as

Airbnb succeeded in making a thick Market that became a much bigger problem and today what Airbnb does is if you try to book my room then even before I have noticed you and and confirmed that you

can have the room they stopped showing my room to everyone else so when I finally say yes to you I don't have to say no to five other people and that makes other people's search more efficient and indeed they've started to

introduce buy it now kind of mechanisms where I can say I'm willing to give this room to anyone with an Airbnb rating reputation above a certain level so that I don't even have to approve them anymore so they're trying to deal with

congestion and we don't see any markets that have failed to deal with congestion right if you can't solve the congestion problem you don't succeed as a Marketplace so

um another thing they've done is instead of having me book my room make my room available in the morning on my laptop and then when I come home from work see if anyone has wanted it they they strongly encourage their hosts to use

their smartphone apps so that they can check on the room during the day and of course they encourage them to to do this by it now kind of features so they're they're trying to speed up the whole process as they must if they hadn't succeeded in that they would be like

Hilton Hotels only telling you one room at a time now another thing they have to do is make the market safe and trustworthy and reliable so that when you book a room you're pretty confident

that the room will look like the one that I showed in the picture when I when I advertise the room and that the key will be where it's supposed to be and that the neighborhood will be safe if I say it's safe and things like that so

they have to deal with issues of safety of various sorts uh and that's so I think these three things helping make a market thick dealing with congestion once you've succeeded in making it thick and making the market safe and

trustworthy and reliable to transact in are going to be the general things that Mark that all marketplaces have to do and as I tell you about particular markets keep those in mind and I'll try

to indicate where uh where those were issues so I've helped design um a number of matching markets uh I'll only talk to you about some of them

today the the first ones on this list are labor markets and those are markets in which wages prices are very important but they don't determine who gets why so medical residencies there was just a

recent match day for doctors in which I'm sure Duke doctors did did very well um wages are important but they don't they're not the the critical thing in general in labor markets when you go out

and get a job the first thing your colleagues ask you isn't what's your salary they say where are you working right the the match itself is important not just the price

um so a number of Labor markets but the markets I'm going to talk to you about today among the ones that I've been involved in are our school choice systems where we don't let money play a role in deciding which families get

places in the top kindergartens in a in a city school system and and kidney exchange I'll also talk to you about about some other markets um so let me

um start talking about about school choice and this is work that um you know I was pretty sure I had this on my slides but yeah well this is work I'm

doing jointly with with a telado who's here and uh Neil de Rosen and patakus at MIT so it's joint work uh

and and school choice is a is a case where where we don't let prices decide who gets which Public School places but making the market thick isn't a problem because schooling

is mandatory in the United States so we we keep up the demand by insisting that children go to school but congestion and safety can be big problems so so let me

tell you about those but the idea of school choice of course is that and what makes it a Marketplace is that parents have some information about which schools would be good for their children

and we'd like to be able to incorporate that information in school assignments right since since even in cities where there are not enough great schools for

all the students it's it's what's really a shame is that if your child is going to a school that would have been great for my kid while my kid is going to a school that would have been great for your kid and that could be avoided

um and so let me tell you about uh about some of the the schools I'm going to mostly talk about New York City in in Boston Schools where

I was deeply involved uh you know Attila and Neil and parag have carried that work forward into a variety of other schools uh around the country so this is a

technology that's spreading as as school districts come to understand what makes school choice work well and what makes it work badly so let me tell you a little about that because many Market

design stories begin with market failures right so the opportunities for Market design are markets that aren't working well so in New York City

um they had an old system well first of all it's the biggest school district in the United States they're about 1.2 million children in New York schools and at the time now slightly fewer but but

at the time that we started working with them about 90 000 students entered High School each year in New York and the way the process worked was families were

invited to submit a list of preferences First Choice second choice third choice um to the to the school district which copied those lists and sent them to the

named high schools and that constituted your application to the high school and um and then the high schools made independent decisions this is back in in um 2000 say

um the high schools made independent decisions which they communicated to to the city to the Department of Education and the city then sent letters to the students informing them of what high

schools they'd been admitted to and of this large number of because the high school's made independent decisions about 17 000 students were admitted to multiple high schools so they would get

letters that said congratulations you've been admitted to these multiple high schools please send us a letter back telling us which of the high schools you've been admitted to you would like to attend and if there's some other high

school that you applied to that you would like to be on the waiting list for so that took a little time and in the meantime there were many students who hadn't yet gotten admitted to a high school because because so many students

had had multiple admissions so they had time to do three letters when when when students sent back their decision that freed up new places in high schools that could make new Admissions and so a new round of letters could go out telling

students where they had been admitted and what choices they wanted to make but they only had time for three letters and at the end of August there were typically 30 000 students who hadn't yet

been assigned to schools who had to now be administratively assigned to schools for which they hadn't expressed any preference just because time had run out and come September you have to be in

high school if you're 14 years old so that was the problem that that they had a big congestion problem but there were other problems as well remember the way you applied to high school was you submitted this rank order

list which got copied and sent to the high schools so if I was a high school principal I could see that you were applying to my school as your third choice and so I could adopt a strategy that

would say you know I'm a popular school I get lots of applications I'm only going to admit kids who have applied to me as their first choice and indeed a lot of high schools adopted rules something like that and of course

that had the effect of meaning that even though you were invited to write down five choices on your rank order list you didn't really have five choices because maybe your first and second choice both would only admit to you if you listed

them as your first choice and therefore you had to decide which of them to list as your first choice so rather than being an exercise in which it was safe to tell New York City Schools what was

your first choice what was your second what was your third you instead had to engage in a strategic calculation what's what's the best school I can get if I

say it is my first choice okay and that's a very different exercise than trying to figure out which schools you'd like to go to okay so that was one of the things that we wanted to

to change and indeed it was understood that this was a strategic process but another issue was that principles sometimes concealed capacities right they were going to be

30 000 children assigned administratively that means basically at random to high schools so if you were a high school principal you had sometimes the ability to say you know the classrooms three of the classrooms on

the first floor are being renovated and they are not going to be ready in September to admit a uh class so we have fewer admissions available than than we would have hoped and then you could

discover in September that that the classrooms were now fully renovated and you could admit three additional classrooms of of children and and because there were so many unhappily assigned people that meant that you

might find students who you wanted to admit to your high school who you who you would prefer to the ones that you would have been assigned to you had you revealed these places initially so there was an over-the-counter Market that

happened late where people with appropriate connections were able to show up on the on the doorstep of schools and get their children into into schools that they wouldn't have been

able to get in the centralized procedure something similar happened in Boston without the congestion problem so in Boston they already had a centralized matching procedure so they had no

trouble getting all the school assignments done before school would start but but they had a problem with also had a problem with safety that it wasn't safe for families to tell the the

Boston Public Schools the school district what their preferences were and in Boston I'm going to talk to about a system that works not just for the high schools but for all the schools so you

can think of yourself as being a family that that gets to participate in this market because you have a child who just became kindergarten age and so now it's

time to to get your kid into a school and the the way the old Boston system works which was uh studied by uh Attila

and his colleague typhoon sanmez um is is it was very benign in intent what they tried to do is they asked you to rank the schools you would like to be in

and then they tried to give as many people as possible their first choice and so the way that worked was they'd look at all the first choices for each school and

if if they could honor them all if there were fewer people who chose a school than its capacity then they just give those people their first choice but in many cases with popular schools they would find that the school was over demanded

that that more people listed in its first choice than they had capacity and so for that they had tie-breaking procedures they assigned priorities to each student for each school so for example

if if a family had an older child who was already attending that school that gave a very high priority for a kindergarten student to attend so that the family would have only one morning drop-off there were some priority for

living close to the school and then they assigned people random numbers to break ties and so the way their algorithm worked was an immediate acceptance algorithm they would they would order all the people who had applied to some

school in priority order and when they reached the capacity limit they would they would accept all the people who who were highest priority up to the capacity limit and then reject the rest

and the the difficulty with the system what made it unsafe to um to share your your information about which schools would be good with your

for your kid was that if you didn't get your first choice there was an excellent chance that your second choice would have already filled all its seats with people who had listed it as their first

choice so even if you had very high priority for your second choice even if you had an older child who already went to that school so that you would have high enough priority to get in if you listed it as your first choice you ran

the risk that um if you listed it as your second choice you'd have lost your priority you wouldn't get into your first choice and your second choice would have filled all its seats so in Boston as in New York

you couldn't just it wasn't safe to tell the city what your choice what your preferences were you had to figure out which school you could get if you listed it as your first choice so you know what could be wrong with the

system like this this is this was the focus of the paper by uh until then typhoon uh it wasn't safe for families to list their true preferences

so the way we address this problem in both these problems the congestion problem and the uh safety problem in both New York and um

and in Boston was with a deferred acceptance algorithm and the Deferred acceptance algorithm turns out to have an older history than its study in economics does it was first studied by

David Gale and Lloyd shapley Lloyd just passed away in the last two weeks and David had had uh passed away some time before and and they wrote a 1962 paper

where they uh proposed an algorithm that it turns out solves both the congestion and the and the safety problem and so let me tell

you how students are now assigned uh in in New York and Boston the the in a very skeletal way uh and it turns out this is related to the way that medical students

are assigned in the medical match okay so here's how the algorithm works first the the preferences are submitted privately now this is one of the things we changed in New York

um the schools no longer see the preference list so as our school principal I know that you've applied to me but I no longer know whether I'm your first choice or your third choice so I

can no longer make admissions decisions of the form I will only accept you if you listed me as your first choice I no longer get that information we don't show the preference list to the schools and then what the algorithm does is it

it goes through the following steps it first has each student apply to his or her first choice and each School tentatively assigns its seats to applicants one at a time in their

priority order but it doesn't accept them now it's going to defer acceptance until it gets to see just what other applications might come in in the future that's why it's called a deferred acceptance algorithm and but it

immediately rejects any applicants who can't be fit in so a kindergarten that has 20 places and gets 40 applicants will order them in priority order reject

numbers 21 through 40 and not yet reject any of the ones in the top 20 but reserve the right to reject them later and then if every student who was rejected applies to his or her second

choice and the schools now look at all the people who have applied now together with the ones who had applied before it orders them in its preference or priority ordering and again it keeps the

it doesn't reject the top 20.

and it rejects the rest who may include some people who weren't rejected in the in the earlier stage but are now rejected as people with high priority apply so that's key here it's that if

you apply as your second choice to a school where you have high priority you'll go right to the top of their list you don't lose your priority of having a child who already goes to that school and then at each step of the

algorithm anyone who was rejected in the previous step applies to their next choice School the schools look at everyone who's applied order them in terms of their original preferences and priorities so they don't care they don't

notice at what point in the algorithm your application comes in they hold on to the ones they can fit they reject the rest and the algorithm the the applications are only accepted when

there are no more applications and at that point each School accepts the applicants the class that it's holding and and uh that's the Deferred acceptance algorithm that's the matching that gets published so there are a

couple of things you can say to to principals and to families about this the first thing you can say is you can say to principals there aren't going to be students who you would rather have been assigned than

the ones that you were assigned to the match there aren't students who you would rather have been assigned and who would rather go to your school than to where they've been assigned how

do you know that well if if I'm assigned to my third choice school and you were my second choice school you're the principal at my second choice School the reason I'm assigned to my third choice

school is I first applied to my first choice and was rejected then I applied to my second choice that's you and was rejected when you filled your places with students you like better than me so if I'm at my third choice school it's

because you didn't want me and if you want me more than the students you have it must mean that I'm at a school that I like better than you if you want me more than students you currently have it means I never applied to you otherwise I would

have written risen to the top of your list because you like me better than some of the students you took so there aren't any pairs of schools and students who aren't matched to each other who would both prefer to be matched to each

other and the thing you can say to families is that it's perfectly safe to put down your preferences in their true order and Loosely speaking the reason is because if you don't get your first

choice your chance of getting your second choice is just as high as if you had said it was your first choice you don't lose your priority by by saying a school is your second choice because

when you apply to them after being rejected by your first choice they put you in the same place in their order that they would have put you whenever you applied so so that turns

out to make it safe completely safe to um to tell the city what schools you really like and so a couple of things happened

one having to do with congestion is this is a computerized algorithm so it works fast they don't have to wait for the males to come back and forth with acceptances and rejections because you've given us a rank order list of the

high schools you've applied to we know if you get offers from both your second and your fifth we know which one you want you want your second choice not your fifth choice so so that's done at computer speed rather than

individual decision making speed we we've asked you to make the decisions before making the assignments uh so only 3 000 students instead of 30

000 students didn't didn't receive assignments to schools they had expressed preferences over and had to be assigned administratively and that's a number that it turns out in a school system the size of New York it's hard to get too much smaller than that number my

understanding is that a a significant portion of those students fail to submit a rank order list right it's hard to communicate with everyone in such a big school system um so that was a big success you know

the many fewer students aren't assigned but a more surprising thing happened in the first years of the New York City match which is although the algorithm didn't change at all the results got

better and better so here's in the first year of of the new algorithm here's how many people got their first choice and second choice and third choice and fourth choice now you look at the second year and you see more people got their first choice

more people got their first or second choice more people got their first second or third choice right people are just doing better in the second year and you look at the third year and still more people got their first choice Moore

got their first or second choice Moore got there first second or third so these these distributions stochastically dominate each other is the phrase for that kind of relationship question is what's going on how come

more students are getting their choices and I think the answer is that remember those places that principles were withholding because if they withheld some places they could they could do deals with students that that would get

them better students than they would get through the the centralized match well that isn't true anymore for the reason that I argued and and so his principal started to learn that more

places started to come to come back into the system that is you'd notice that the renovation on your first floor classrooms was already done and uh you could just admit the students through the centralized procedure because waiting for them to show up on your

doorstep was no longer having the good effect that it once did and because you weren't getting assigned random students anymore you were getting assigned the student to it you asked for so that was an unanticipated benefit

about making the market safe on both sides so let me switch from school choice to other markets and let me start by by talking about

wheat because wheat is the prototypical commodity Market but commodity markets need design okay the the you know let's think about how commodity markets are

designed uh wheat started off as a matching Market because fields of wheat are heterogeneous they're not all the same so in the 1800s if you wanted to buy

wheat you had to inspect it because every field of wheat is different and that also meant that that you didn't just look at samples you might want to develop relationships with particular farmers who would who grew the kind of

wheat you wanted to buy so what I say in the book is that God made wheat but the Chicago Board of Trade made number two hard red winter wheat which is what we

make bread out of and that that involves designing the Commodities so that you don't have to look at them before you buy them so you know now there are eight classes of wheat you know durum hard

Reds hard red spring hard red winter Soft Red winter hard white you know so you can buy uh wheat like a financial commodity you you don't have to inspect

it you can buy it before it's planted you don't have to know who you're buying it from you don't have to sample all the offers it's a financial market and that changes of course what wheat is

available uh but often when we speak of commodifying things we we act as if that automatically lowers the quality which it might do you know you in you can have a certain percentage of softweed in your

hard wheat and still be called hard wheat so so that might damage but but it often improves the the quality there's a new um commodity Market in Ethiopia called the Ethiopia commodity exchange which is

basically a market for coffee and it used to be that if you wanted to buy coffee from Ethiopia which is a big producer you had to send a man to to Addis to to taste the coffee because you had to sample it every you know coffee

beans are different but now they've got a commodity exchange where they've successfully made a market design that allows them to reliably grade coffee it has to do with double-blind grading so that the people

tasting the coffee don't know whose coffee it is so they can't be bribed to say it's high quality and that has made it possible to buy coffee in bulk at a distance by you know you can order grade

a coffee from Ethiopia and and buy a lot of it without examining it turns out that's also also increased the supply of grade a coffee then and the story about coffee is I understand it is

when you sell coffee you're selling the beans and the beans are always brown but when you're harvesting them they're in a cherry and um it's ripe when the Cherry is red when

the Cherry is green you shouldn't Harvest them yet but it's hard to tell by inspection when when it was harvested so when there wasn't good quality control when you weren't getting rewarded for producing high quality

coffee the economical thing to do was go to some Hillside and tell your Pickers to to Harvest all the bushes even though even though while they were mostly red cherries some of them were green but now

that you're getting rewarded for producing grade a coffee it makes sense to tell your Pickers only pick the red cherries and we'll come back later and pick the ones that are now green so so

having a reliable grading system and a commodity Market actually increase the amount of high quality coffee coming out of Ethiopia now commodity markets used to be sold

you used to operate here's a picture of the Chicago Board of Trade and you know you're just supposed to see that it's a hectic mess uh you know they operated in trading pits where people would signal to each other you know I want to buy

five at a price of two and and you know the first person to shout that they took my offer would get it and that's how commodity markets looked in in the early days um

you know here's here's the trading pitch well we don't do that anymore most trading these days is done through computers and some of it is done by computers but we still use the old rules

and they may have become somewhat dysfunctional so one of the questions that we're always facing is how does technology change Market designs and it's easy to see that with new markets

it's easy to understand why eBay didn't exist before the internet um you know because you can now do garage sales on a national basis but at the same time why Uber

couldn't exist just with the internet why it needed smartphones that know where you are so you can call a taxi wherever you are you don't have to be at the at your computer in your office

um so um let's think a little bit about commodity markets like Financial Commodities and how they're traded and and now I'm going to tell you about work by Eric butish who's a former student of

mine who now teaches at the University of Chicago and his colleagues uh Crampton and Jim um and what they've been looking at as have a lot of other people is there's a

movie on the subject now is about high-speed trading and how that has changed the way we trade Financial Commodities uh and it's changed the nature of competition in those markets

so the example that I want to use is trading of very similar Financial Commodities on the New York Stock Exchange and the Chicago Mercantile Exchange and the Commodities that I'll

use as my example are standard and Poor's 500 Index bundles uh you can trade them in different ways exchange traded funds and Futures but but of

course they they're the same economic bundle so their prices move together in both markets uh and the rules are the same rules that used to be in in commodity trading pits the first person to take a bid or an Ask

gets the trade and what what you like is if competition on bids and asks should should be price competition I should try to make my bids and ass close together so I can get

trades on both sides of the market uh but instead what we're starting to see is competition also on speed and so the way you communicate prices

between New York and Chicago is is along electronic communication lines of various sorts and the first ones went along the roads and it's 790 Miles by

Road between New York and Chicago and so the speed of light gives you some transaction time for getting information back and forth but it's pretty fast because uh it used to be about

um 16 milliseconds but in 2010 someone invested in a straighter line so it was shorter so instead of um 16 milliseconds it went down to 13

milliseconds and that turned out to give a big advantage to the people who got their information on that line because they could take trades earlier than other people and it had a bad effect on

competition because if I'm a liquidity provider I try to provide bids and ass that are close together but if you're faster than I am and you get news about a price change in one market that is

going to be echoed in the other Market faster than I do then you can take my stale quotes and act on one of them before I can change it so I have to spread them further apart to protect

myself against against getting sniped like that so just to put this in context it takes up to 400 milliseconds for you to blink your eyes so when we're talking about a three millisecond difference

we're not talking about a difference that makes the kind of difference that you could Ponder economic news right this is this is really fast stuff

so uh you know and the demand comes because of this first come first serve the first person to to take a quote gets it so

here are the prices of these two uh standard pools 500 bundles on the two exchanges hour by hour at at some particular game uh and what you see is they move really closely together that doesn't

mean they don't change during the day but they move really closely together they're the same thing one in New York and one in Chicago and what you see is a little after a little before two o'clock there's a relatively big price drop but

they jump together when you're looking at it these data are minute by minute okay now let's look at it millisecond by millisecond the same day the same jump

and what you see is here's 150 139.55 and you know before 151 39.600 the big jump takes place and it happens

in one market before the other that's why the the high-speed trading is valuable someone can see the market move and trade on the stale prices in Chicago

or in New York uh before they get there and maybe even buy from me and then sell back to me when I when I update my stale prices right so they they're in and out quick taking advantage of that few

millisecond difference between their information and mine now if you look at the duration for those differences between New York and Chicago you see the duration gets shorter and

shorter as trading gets faster and faster how long those Arbitrage opportunities remain gets less and less time but how profitable they are stays constant so if you can jump on them faster you

can make quite a lot of money on many many of these transactions over the course of of a day but you have to jump on them faster and faster because they're not lasting very long so that's

something that that is using the old rules of of transactions of the marketplace first come first serve in a world where more and more of the trading is not done by

human beings but is done by computers where where that competition by speed may be inhibiting competition by Price not to mention the fact that billions of dollars a year are spent to know social

purpose on building faster and faster high-speed Alliance the fastest ones now are at eight and a half milliseconds you know the the 13 millisecond lines are now obsolete you can't use them to trade

on so um so this can have you know bad effects of a number of sorts and one proposal that that Eric and his colleagues have have made is they say supposing we we

ran Financial exchanges not first come first serve continuous time supposing we just ran them every second okay so a second is a short time for processing economic news but it's long

enough that lots of transactions get offered for standard reports 500 uh bundles so you could you could run them every second and a second is slow enough that everyone can keep up everyone can

can process a second so uh that would be a different kind of Market it would need some regulatory changes to allow it to compete with other markets because there are rules now that that require markets

to constantly post prices um but that and other changes are the kind of Market design changes we should expect to to see as technology and old

rules interact so so rules are part of the technology and we have to keep them up to date uh so I think this is a a pretty

standard story that is markets or living things they they are you know people who develop new strategies part like to a new technology partly through other methods that that market design will

will have to keep up with uh one of the examples I sort of give so Market design is is a part of economic engineering and the economics

response to to all sorts of of things one of the examples I gave is Bridges you know the basic physics the recent Bridges stand up hasn't changed since the Romans built their bridge but we

built Bridges differently today and even bridges on the same design get longer and stronger and lighter over time and partly that's because of technological change it's also because Bridges

themselves change people's behavior when you build a bridge over a river you get more traffic over that River and then you need bigger roads on both sides and after you've got bigger roads you're going to get still more traffic and

eventually you'll need bigger Bridges so markets also change people's behavior and Market design like bridge design uh has to adapt over time in ways that that

you know fundamental physical principles don't don't have to adapt over time that's that's one of the differences between engineering and science so in that spirit let me tell you about kidney exchange which is one of the

markets I've been involved in that that doesn't allow uh prices to play a role at all and the the story about kidney exchange is uh there's a lot of kidney disease in

the world and the treatment of choice you know here at the dawn of the 21st century is still transplantation okay that's something that's only been possible since the 1950s so it's a a new thing eventually it'll be an old thing

and we won't have to do it anymore but but by the time we don't need to do transplantation everyone who now needs a kidney will be dead so so we have to think about how to take care of the people who are ill now with the technology we have now and this morning

more than a hundred thousand people were waiting for a deceased donor kidney in the United States and we only do about 11 000 deceased donor transplants a year in the United States so the weight is long and costly

and dangerous and people can die while waiting um here probably the way you get on the deceased on a registration list is the way we get on it in California we encounter it when

we get our driver's licenses and there's a question on the Department of Motor Vehicles Forum that asks if you'd like to be registered on the organ donor registry and about half of American

adults are are registered but only about one percent of deaths result in donatable organs it turns out dying is bad for your organs um but so you have to die on a

ventilator you have to die brain death on a ventilator so so there's a shortage of organs um but there's another way you can get kidney transplants because each of you

has two kidneys and if you're as healthy as I as I hope you are you can remain healthy with just one kidney and that means that if someone you loved were

had kidney failure and and you know was a threat of losing their life you could save their life by donating a kidney to them you have to be healthy enough you'd have to go through a lot of tests but

but even if you're healthy enough it might turn out that you can give a kidney to someone but you can't give it to the person you love because kidneys have to be well matched

and um that's what opens up the door to economists uh sometimes you can't give a kidney to the person you love and I can't give a kidney to

the person I love but we but I could give a kidney to your patient and you can give a kidney to my patient so that opens up the door to exchange and the simplest kind of exchange is is between

two pairs two incompatible patient donor pairs so in this picture donor one loves recipient one but they have incompatible blood types that's a barrier to transplantation uh donor two loves

recipient too they have the opposite barrier so you can see that if we can get these two pairs together it's possible to get two transplants where otherwise we wouldn't have any because the type B kidney can go to the type B

patient and the type a kidney can go to the type a patient so that's an exchange notice that it's an in-kind exchange one week no money changes hands one

reason no money changes hands is it's a felony in the United States to to pay for a kidney for transplantation here's uh a sentence from the national organ

transplant act which says it's unlawful for any person to acquire uh transfer any human organ for valuable consideration for transplantation so

valuable consideration turns out to be a a somewhat tightly packed legal phrase you might look at this picture and say to yourself that sure looks like

valuable consideration for me a valuable kidney is being exchanged for another valuable kidney um the we started doing these things in

the US in early 2000 uh the justice department declined to write a memo saying of course it's legal justice department is not wild about writing memos

eventually Congress amended the law they looked at this sentence and wrote an amendment said the preceding sentence does not apply with respect to human organ paired donation paired donation is

a polite phrase for kidney exchange that doesn't include the word exchange and consequently makes it even clearer that no valuable consideration has been given and and basically the Congress decided

this was passed by a claim after three tries it was the third Congressman which was introduced the sponsor in the house with Charlie Norwood who passed away due

to an immunological post-transplant disease and his colleagues at that point named the act after him and passed it unanimously so so the repugnance to

selling kidneys doesn't transfer to the to kidney exchange at least in the United States we think of kidney exchanges as a transaction that people can do even though selling kidneys is

something we don't like I just spoke about this in Germany the German law doesn't allow kidney exchange because the German transplant law in order to make really sure that you haven't bought my kidney says you can't have my kidney

under any circumstances you can only receive a kidney in Germany from a member of what they call your first order family your parents your siblings

your spouse or your children so um and I think the the idea is that if I showed up wanting to give you a kidney in Germany they would presume that you had bought it from me so one of the

things that my German colleagues and I are trying to do is try to change the law to allow exchange because if I want to give a kidney to my brother and you want to give a kidney to your brother they're already sure that no money has changed hands they're they're confident

of that because it's my brother and now we turn out to be incompatible so we want to engage in exchange they shouldn't feel that there's more of a burden to prove no no commercial thing but we'll

see the the German uh prosecutors don't have a sense of humor so so we'll see what happens um so there's a lot of congestion in organizing kidney exchanges uh I'm The

Man in the Yellow gown keeping my hands to myself um there's a kidney in uh in this bucket it comes from an operating room right behind me in this picture not not here

you you can't see it but steps away the nephrectomy the kidney removal has just been performed and here the transplants going in this is happening in 2006 uh in

um so before the Norwood Act was passed uh it's happening in 2006 in Cincinnati Ohio and at the same time in Toledo Ohio Mike Reese and his surgical colleagues

are doing the same thing with the patient Who belongs to this donor and the donor Who belongs to this patient that is the donors traveled from Cincinnati to

Toledo and from Toledo to Cincinnati and when I say at the same time the the guy in the red cap is is named Steve Woodall uh after the surgeons had

anesthetize the patients and uh made the initial incisions he got on his cell phone from the operating room and called up Mike in Toledo and said we're ready here are you ready and only when

he heard that they were ready did did both sets of operations go ahead and that's because you can't give valuable consideration for a kidney and that means you can't write a contract that says we'll give you a kidney today and

you give us a kidney tomorrow so to make sure that the links all work they uh they do it simultaneously but what that means is the market is congested to do even a simple exchange you have to be able to assemble four operating rooms

and four surgical teams at the same time to do a three-way exchange simultaneously you'd need six operating rooms and six surgical teams because you have to do the nephrectomies and the

transplants all at the same time so uh you know and the nephrectomy immediately proceeds the transplant that that's one of the good things about living donor kidneys so

um so it's hard to do big exchanges turns out um you can sometimes do big exchanges if you start with a non-directed donor so we have a couple of hundred non-directed

donors in the US each year they um they want to give a kidney to someone but they don't have a particular patient in mind so you can arrange a chain in which each patient donor pair gets a kidney before they give one that means

you don't run the risk that when when if the link is broken that some pair will have already given a kidney but not gotten one which means not only have they had a a surgery that didn't benefit

them but they no longer have a kidney to exchange so they can't participate in next week's kidney exchange but if you can make sure that everyone gets a kidney before they give one a broken link doesn't have that property so

instead of having only six people in the picture which is what we could do with six operating rooms assembled at the same time we can now get longer chains here's the very first one organized by

by Greece in Toledo you've had 20 people in the picture 10 transplants and 10 nephrectomies it was eventually extended to a longer chain another 12 transplants

came out of it and sometimes we have very long chains uh the average length of a chain in the United States is five transplants now but so that there are some short ones there are some long ones

and Bridge donors are the donors who are asked to wait you know your sister gets a kidney today and we ask you to give a kidney next Tuesday we only have about a

two percent renege rate so people are much nicer and more complex than economists sometimes give us credit for kidney exchange is growing in the United

States it's growing elsewhere in the world as well uh I have a Blog called Market design and one of the things I follow is kidney exchange and the most recent entry of this sort was on was

this month uh in 2016 the first paired kidney Exchange in Singapore so kidney exchanges is spreading slowly around the world but there are places in the world where there's very little care for

kidney patients this is a chart that shows deceased donation per million population and living donation per million population so the us we do

pretty well on both Germany is here they do pretty well on deceased donation but of course they don't do so well on living donation because their law really restricts who you can get a kidney from and particular they don't have kidney

experience but there are places like the Philippines in Nigeria where where there's virtually no transplantation and the Philippines is an important place because they actually have good hospitals there you

could get a transplant competently done you know ably done and you could get post surgical care in the Philippines the reason they have so little transplantation is Philippine health insurance doesn't cover it so it's

outside the financial reach of most people so like Greece initiated a project that Tim and I have been talking with him about for a number of years now on uh trying to incorporate some of

these Philippine patients into American Kidney exchange with the idea that every time you transplant an American it saves the American Health Care System a good deal of money say a quarter of a million

dollars in the first five years that's sufficient to pay for the transplant and post-surgical Care forever of the Philippine pair so there's a possibility

of some kind of mutual Aid where where you'd incorporate these guys into into exchange here's the American pair here's the Philippine pair they neither of them can get the transplants

on their own but but there's a financial barrier for the Philippine pair uh incompatibility barrier for the American pair they can help each other out with the American Health System paying

through a cost from the savings to the American system so the first uh Philippine pair is now a year old they they participated in what's become a

pretty long chain and our because of the self financing aspect they're now back they've been a year now healthily back in the Philippines with an escrow account that pays for the

lifelong immunosuppressive drugs and things like that that they're going to need so this is something where the the engineering the design is going to have to come in uh Financial flows you know

the savings come at some places like Medicare and private insurance and the cost the new costs come at transplant centers for for surgeries and later on for drugs delivered overseas

um this is still a work in progress I'm not sure how quickly we'll make progress but uh Tim and Mike have a paper on the legal aspect of this and there are

various other uh papers in the in the in the mix which have been rejected by very fine journals so

let me close by saying that matching markets are important they're some of the most important markets that we deal in um you know where you go to school what job you get who you marry whether you get a

kidney these are important things they're not commodity markets they're not markets where you can just choose what you want you also have to be chosen um when you look around and say what other

matching markets are failing one of the ones that comes naturally to mind is Refugee and migrant resettlement okay we're seeing a lot of problems of that sort in Europe

um refugees are just the people who you can't tell them where to go they were someplace they didn't want to be and they left their their people who can move of course here in the United States once you come to the United States we

can try to resettle you someplace but you're free to go wherever you like so um so for instance there's a Somali community in Lewiston Maine it's not because

the somalis all really like cross-country skiing it's because there was a Somali community in Lewiston Maine and if we try to settle you in Wisconsin now you might like to go to Lewiston there are good economic reasons for you

to want to do that for instance I live in California and if you come to California you know if you migrate to California and you happen to speak only Mandarin or only Spanish you can still

find work in California while you're learning English you'll surely have to learn English but but you can find someone who will employ you and give you instructions in your language and talk

to the customer in English while you're getting used to living in California whereas if if you were resettled in Wisconsin the best we might be able to do is is get you translated government

forms of how to apply for assistance in in Mandarin uh but but you're working in California so as we think about refugees in the current crises which are

full-blown now and and therefore not ideal places for for orderly redesign of refugee and migrant resettlement we should learn what we can from the future we'll have many opportunities to learn

what doesn't work well and maybe some things that work well because there will be refugees after the Syrian Civil War and in particular if the sea level rises

there will be lots of refugees in The Next Century so we had better learn how to handle Mass migration of people which is a matching market and uh I'll stop there because I'd like to leave some

time for questions [Applause] are just a couple of questions so uh and

Joseph will make his way back to you with a microphone that we think is not just ornamental but we'll discover [Laughter] questions

I know okay thank you Professor Ross um can you comment on the effect of this Improvement on illegal exchange of

kidneys on black market exchange of kidneys okay so you know repugnant transactions and the way Kim and I talk about them are transactions that some people would like to engage in and other people don't

think they should and what that means is often when you make a market illegal you you see plenty of black markets um they are black markets for kidneys um

I visited one in Azerbaijan in Baku um I don't see global kidney exchange as having immediately significant effect on those markets

because because the people who want to buy kidneys are mostly people who don't have a willing living donor and the people who want to sell them are mostly people who don't have someone they wanted to give a kidney to so so I see

this as intersecting more like kidney exchange there's as you know a long discussion about whether we should be changing the incentives for donors to

get more donors and right now in the United States if you wanted to give me a kidney um it would cost you money out of pocket you'd have to fly to California where I live and you'd have to get a hotel room

and you'd have to take time off from work uh you could pay several thousand dollars easily just just giving me a kidney and we don't for instance make it easy to to for you to be repaid for that

so I think there's growing consensus that we should do better on that and there's some sentiment that maybe we should start allowing someone maybe the federal government to uh to pay for for

kidneys and the question the the surgical Community is divided on the effect that that would have on black markets there are there are anti you know people who say don't pay for

kidneys who who think that there's already some difficulty in in getting the the authorities to discourage black markets in Far places and that if we made a legal American

Market that would even if it was an orderly one that would that would cause unruly you know terrible black markets to to multiply overseas and of course there are people who think that having legal

markets would would shut off some of the oxygen for the black markets much the way that buying nice wine today and uh wine store is very different from buying uh bootleg

whiskey during prohibition when when you had to buy from criminals so uh so I don't know you know but but black markets are are hard to uh to stamp out right I mean think about not not just

kidneys which we we like kidney transplants think about the markets for Narcotics um think about Prohibition you know I think the story with prohibition is we repealed prohibition and accepted a

somewhat higher alcoholism rate for a somewhat lower greatly lower crime rate associated with alcohol so I think that many of these questions are are

empirical if uh I mean think about the the market for Narcotics I mean no one thinks that anyone should take heroin but if you told me that legalizing heroin

would cause a small increase in addiction and a great decrease in crime I'd probably be in favor of it if you told me that it would cause a great increase in addiction and only a small decrease in crime than I'd probably

think it was a bad deal okay um pretty comment on the kidney Exchange Market in Iran and how that compares to some of the models you uh notice so so

so the one country in the world where there's an explicitly legal monetary market for kidneys is the Islamic Republic of Iran and they don't do kidney exchange you can purchase a

kidney there um you couldn't purchase a kidney there their law says that you have to have the same citizenship as the person you purchase the kidney from so it's mostly Iranian but there's a small Afghan Market as well

um it's hard to get good data on how that market works one thing though about repugnant transactions is making them legal doesn't always make them non-repugnant so one thing that so I

don't know very much about that market uh they've only recently begun to digitize their data and the gentleman who is responsible for that just passed away so so we haven't gotten any digitized data from that market

um one thing that worries me about that market is when you interview people who have sold their kidneys in Iran they mostly wish to remain anonymous right so this is not something that they're proud

of when I was young we had a the Vietnam War was on and we had a conscription Army and today we have a volunteer army and one of the things we talked about was would that turn American soldiers

into mercenaries and I think effectively you know you can you can have other opinions about other effects but effectively it didn't do that right today when someone runs for the Senate if he was a marine it's his campaign

that says he was a marine you know you should vote for me because when I was young I was a marine and we were happy to line up behind them when we board airplanes um that's not the case apparently with kidney sellers in Iran they wish to

remain anonymous so so there's something wrong with that market because I think if we were to have a successful market for kidneys in the United States one of the ways you could tell it was successful was years later when people ran for the Senate they would say you

should vote for me because when I was young I did a good thing I saved a life and and donated a kidney and you know of course I was paid that's not an issue when I was a you know when my when my

colleague was a marine he was paid too it's still service to the country so one of the interesting things I've sort of discussed and heard discussed about

trying to remove the disincentive for kidney donors in the US would be to to do something like saying when you donate a kidney you get something like an honorable discharge from the Army you know you can

now go to VA hospitals you get you know you you served your country um I wouldn't mind when I bought a plane lining up behind kidney donors too but but that's not the case in Iran so I

don't know enough about Iran but that's a that's a flag in the wind that something about that market isn't quite working the way it should and there are lots of repugnant markets that are legal in some places not in others again I was

just in Germany prostitution is legal in Germany but my guess is no one runs for German political office and says vote for me because when I was young I was a sex worker um you know it's still a repugnant Market there's something wrong with

wrong with markets where where I'm not proud of of having participated in the morning I think I should be concealed thank you

[Applause]