Preferences in Matching Market Design

Harvard University, Cambridge MA

Investigators

Abstract

In the past decade, market design -- "economic engineering" -- has been central to the design of public programs including procurement auctions and school choice mechanisms. Market design's practical applications are made possible by a growing theoretical and empirical understanding of how to design market-clearing mechanisms that are robust, efficient, and fair. Many of market design's most versatile tools are based on the theory of "matching," which provides algorithms for identifying market outcomes that are resistant to deviations by small groups of market participants. However, the effectiveness of matching market design depends crucially upon the structure of market participants' preferences. In many settings, stable matching is only possible when market participants' preferences satisfy a "substitutability" condition that rules out complementarities across contracts. The proposed research will develop the theory and practical algorithms needed to expand matching mechanisms to allow structured forms of preference complementarity. Additionally, the proposed investigation will give insight into how the choice of market mechanism affects the pre-market investments that determine individuals' preferences and abilities. For example, the work will determine which mechanisms incentivize individuals to make efficient human capital investments before entering the labor market. The proposed projects will provide conceptual guidance as to which real-world markets can be effectively targeted by market design techniques. Specific applications include the matching of cadets to their branches of military service, allocation of municipal resources, and the design of policy to encourage innovation and entrepreneurship.