Nobel Laureates In Economics 2012: Recognised For Designing Unusual Markets
Dr. W.A. Wijewardena
The failed market for kidneys
Some time back, a sister of a friend of this writer had been seriously ill with the malfunctioning of both her kidneys. The available medical treatment was to get a donor with a compatible kidney to donate one. The donation in this case is just a pretext on paper and it is actually a sale of a kidney for profits, since in Sri Lanka there is no legal market for live human body parts. Hence, there is a thriving underground market for kidneys in which many people earn a living. They are the touts who find potential kidney sellers and arrange for the sale, the seller himself and medical practitioners who do the transplanting, in good faith of course, ignoring the sale-fact behind it.
Eight years ago, driven by desperation, my friend too found a potential kidney seller through a tout and the price was agreed upon at half a million rupees. But on the day the transplant was to be done, the seller backed out pretending ill-health. Perhaps, he would have found another buyer who had been ready to pay more. Nothing could be done about it at that last minute because the tout had disappeared with the advance money he had collected. My friend’s sister had to die under these tragic circumstances, but he could not seek redress through legal channels though the seller had dishonoured his contract. That is because he did not get legal protection since he had been dealing in a market not permitted by law. Though there is a price and the price is determined through negotiations, obviously there is a market failure in the sense that the transaction could not be completed to the satisfaction of the parties involved. But in this case, the market failure has been activated by a governmental ban imposed on the ground that selling live human body parts is immoral, unethical and unjustifiable.
2012 Nobel Laureates honoured for designing markets
Surely, the markets for human body parts, and many others of similar nature, are quite different from the markets which one would go through on a day to day basis. But these markets too should have an equilibrium point, stability and satisfaction for all the parties who do trading in them.
This was the subject matter studied by Lloyd Shapley of the University of California, Los Angeles and Alvin Roth of Harvard University, both in USA, with an extraordinary passion and that earned them a Nobel Prize in economics in 2012.
This was the subject matter studied by Lloyd Shapley of the University of California, Los Angeles and Alvin Roth of Harvard University, both in USA, with an extraordinary passion and that earned them a Nobel Prize in economics in 2012.
Gale-Shapely Algorithm: Best choice through repeated action
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David Gale and Lloyd Shapley analysed two events in their 1962 paper that gave rise to Gale-Shapley Algorithm. Those two events were marriages and admission to colleges. In the case of marriages, the stability in marriage happens when the two partners have no any further incentive to look for new partners because both of them are now fully satisfied with their chosen partners. Gale and Shapley pointed out that people can have the best match for them by following an algorithmic or in other words, an iterative process. The same choice can be made by people when they seek admission to colleges. They will go on repeating the search until they find a college which is ready to accept them as students.
For instance, take the matching in marriages. Assume that our marriage market consists of five men and five women searching for suitable partners. If man one’s best choice is woman one, but woman one’s best choice is not man one but, say, man three, then, there cannot be a match between them. Man one has to look for a woman who chooses him as her best choice. Suppose that man three’s best choice is not woman one but woman two. Then, woman one and man three cannot be matched. Everyone therefore has to go on searching until they get a match and at that stage, they can make a choice and end up pairing themselves. Those who have got married through the market or those who have sought admission to their preferred colleges can certainly talk about this experience which they would have had.
Implications of Gale-Shapley Algorithm For instance, take the matching in marriages. Assume that our marriage market consists of five men and five women searching for suitable partners. If man one’s best choice is woman one, but woman one’s best choice is not man one but, say, man three, then, there cannot be a match between them. Man one has to look for a woman who chooses him as her best choice. Suppose that man three’s best choice is not woman one but woman two. Then, woman one and man three cannot be matched. Everyone therefore has to go on searching until they get a match and at that stage, they can make a choice and end up pairing themselves. Those who have got married through the market or those who have sought admission to their preferred colleges can certainly talk about this experience which they would have had.
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