Personalized Resource Allocation

Yale University, New Haven CT

Investigators

Abstract

Economists have a good understanding of how prices are formed in competitive markets, featuring large numbers of small, anonymous, well informed people, as well as how these markets allocate resources. These markets are useful examined with the supply-and-demand analysis that makes its first appearance in introductory economics, and is still the workhorse approach to a great deal of economic analysis. Of course, not all markets are competitive, and large bodies of work have moved beyond this point of departure to study the effects of various frictions; some participants may constitute sufficiently large parts of the market as to be able to affect prices, giving rise to the study of oligopolistic and monopolistic markets; some people may not be well informed, giving rise to the study of asymmetric information; and so on. The research described in this proposal takes the study of resource allocation in a complementary direction by relaxing the anonymity that plays an important role in competitive markets. Instead of assuming that economic activity is mediated through common but faceless prices, with people not caring and often not knowing with whom they trade, we examine cases in economic activity is mediated through personal interactions whose participants recognize and know one another. These personalized interactions may arise in the context of markets, but with agents who are neither homogeneous nor anonymous, or may arise in the context of more individual relationships. The standard finding in economics is that market frictions lead to inefficient outcomes. In contrast, we show that personalized resource allocation mechanisms may often have salutary efficiency implications, and may play an important role in cases where prices and markets are ineffective. The proposed research has three components. The first component will examine market interactions between agents who can use distinguishing features -- skills and investments that they bring to the market, or reputations they have accumulated in past interactions, or connections in a network structure -- to tailor the attendant resource allocation to individual characteristics. We will identify cases in which the resulting personalization enhances efficiency, and will examine the forces behind these effects, as well as cases in which the result is a misallocation of resources. Attention will be particularly devoted to cases in which the matching process that brings people together in the market creates the appropriate incentives to undertake efficient pre-match investments or to reveal critical information. The second component will focus on personalized relationships between individuals. This research will begin by examining an abstract model of agency that uses duality techniques from convex analysis to extend and simplify many existing results. This analysis will provide new tools and results and will also establish a useful connection between agency problems and matching markets. This abstract analysis will be complemented by more specific applications to repeated agency and to bargaining. The third component of the research will examine the foundations of the preferences and belief-formation processes that shape individual behavior. This work will emphasize evolutionary foundations, and will spill over into the evolution of communication in biological settings. The goal here is a better grounding for the models of individual behavior that provide the inputs for the study of markets and relationships.