Economics, in popular imagination, is about free markets. Since the collapse of communism, however, Economics shifted much of its focus to institution building. This has seen economists changing the way that radio frequencies are distributed to firms—including the frequencies of cellular phones—how doctors are allocated to their first position, how millions of students get assigned to a public school, and even the way that human organs get from donor to recipient.
These changes are the real-world consequence of decades of deep theoretical work, work that has been awarded 20 Nobel prizes. Moreover, in many of the applications above, once economists developed the right model, the distance between theory and practice has been remarkably small. Algorithms developed by economic theorists have been directly applied to some of these problems, with no significant modification, proving Nobel Laureate Alvin Roth correct in his assertion that "there is nothing more practical than a good theory."
Market Design is the study of building better institutions. It melds behavioral economics, game theory, computer science, mathematics, and an engineering mindset to build a formal model of an interaction of interest—like assigning students to schools or radio spectrum to firms—and design a set of rules and procedures for participants to abide by, which will lead to a socially beneficial and fair result.
Here are some of the problems that we work on in this context:
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School Choice: The city of Boston has over 100 public schools. A typical student can be eligible for several schools, and the city asks students to submit a preference ranking over the schools for which they are eligible. However, under the old system, it was not safe for students to tell the truth on this list. Indeed, many families, especially those with the free time to do so, would work together to pool information and find the best strategy for reporting to the algorithm. Students who failed to do so might end up in their least-favorite school when a better report would have gotten them their second- or third-favorite.
In 2003, a groundbreaking analysis of the school choice problem, by Tayfun Sönmez and Attila Abdulkadiroğlu, was published in the American Economic Review, exposing this problem and suggesting a remedy. Together with Parag Pathak and Alvin Roth, they convinced the Boston authorities to adopt an algorithm that is safe and fair. The ensuing decades have seen an explosion of such reforms, all over the world, though not yet in Denmark. We join a global community of academics to continue to improve these school assignment algorithms. In particular, Dr. Tierney, with coauthors, developed the first tractable model to include crowding effects, which should allow students better opportunities to express their preferences over their education. -
Environmental Resource Allocation: The real-world success of market design in many applications has spurred us to consider their application to the many environmental resource problems we face. The most popular current example is carbon trading markets, but there is much more to be done at many scales. Here we face some difficult fundamental questions about what really is a fair allocation. Dr. Sudhölter is one of the world’s foremost scholars in the study of fairness in cooperation, having developed a general solution, called the modiclus, for understanding these issues. Dr. Tierney has developed a model and algorithm for assigning limited fishing quotas amongst the fishers within a country.
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Fundamental Structural Questions: Economic theory has always been dedicated to discovering the hidden mathematical structure of human interaction. Beneath each of the above applications lies such a structure, and deeper understanding of these structures—and what unites and separates them—has always led to better algorithms and better applications. Thus, we do not neglect these deeper questions. Dr. Treibich, for example, studies how voting rules lead to cooperation in deliberative bodies, and Dr. Tierney studies the underlying structure that leads algorithms to be safe for participants in the way the new school choice algorithms are safe for students.
If you are interested in knowing more about our research in this field, contact Assistant Professor Ryan Tierney.