CAREER: Market Design and the Limits of Markets

Stanford University, Stanford CA

Investigators

Abstract

This CAREER project will focus on the design and limitations of markets. The broad aims of the research are to understand how specific market institutions, such as the design of auction or matching markets, affect economic outcomes, as well the limits to what designed markets can accomplish. There are three components. The first focuses on matching markets, such as labor markets or multi-unit auctions. Motivated by a recent antitrust case against the National Residency Matching Program, the research studies how the absence of individualized prices might affect matching market outcomes. The second project considers how auction rules, in particular the choice between sealed and open bidding, affects market participation, bidding behavior and resource allocation. The project develops new theoretical hypotheses and will test them using data from U.S. Forest Service timber sales. The final project studies service provision by local governments. The question is why and when governments provide services internally rather than through the market via contracts with private sector firms. This decision is political, but also relates to the classic question of when markets can provide services more efficiently than a centralized organization. The project will examine the predictive power of different theories of privatization using a dataset on local government service provision that is currently being constructed. Each component includes an educational plan that integrates the research into classroom teaching. Understanding the performance of auction and matching mechanisms is of crucial importance in allocating natural resources, in labor markets and financial markets, and in dozens of other settings. The first two projects will shed light the functioning of alternative matching market institutions and on the relative merits of two ubiquitous auction designs, the open ascending auction and sealed bidding. The third line of research addresses a fundamental social science problem - where to draw the line between the public and private sectors - and will gather new data to investigate this problem in the context of local government service provision. All three research projects have direct policy implications - for natural resource allocation and other auction settings, for the provision of local government services, and for assessing the competitiveness of matching markets and the role of centralized market-clearing mechanisms.