Scott Duke Kominers and Alex Teytelboym
Income and wealth inequality has (once again) taken center stage in public policy. Much of the discussion regarding potential solutions has focused on taxation and large-scale redistributive programs. But inequality exists in a number of economic domains, including education, health, housing, and employment that broad brush macroeconomic solutions will not necessarily address. Therefore, it is essential that we bring microeconomic tools to bear on inequality.
The new approaches of economic design translate economic theory and analysis into practical solutions to real-world problems. Research in the design of marketplaces has shown ways of improving: the stability of market outcomes, the incentives provided by market mechanisms, and the efficiency the final market allocations. Famous and high-profile applications of marketplace design include spectrum auctions, matching of residents to hospitals, allocation of students to public schools, and living donor kidney exchange.
Most applications of economic design thus far have involved large-scale, centralized public projects and were not directly motivated by inequality (perhaps with a notable exception of school choice). A lot tends to be at stake, whether it is $50bn in a wireless spectrum auction or tens thousands of doctors in the residency match. However, in recent years many market designers have begun work on applications that have direct bearing on inequality in society; e.g., school admissions with minimum and diversity quotas, distribution of public housing, and allocation of food to food banks.
Topic areas covered include education, health, housing, employment, the digital divide, and international development.
This volume will show that market design tools can be effectively deployed in a variety of contexts at a low cost often with only local community intervention. Redesign of market institutions can play an important role in correcting market failures when other economic tools, such as taxation or direct regulation, are infeasible. Many disadvantaged groups in society lose out on the ability to organize and allocate resources through a centralized system with agreed-upon rules. By actively changing incentives within the marketplace, we can hope to incorporate equality and equity goals explicitly, so as to endogenously alleviate social problems. For example, through an intelligent redesign of the system to allocate food, Feeding America (a nationwide network of food banks) has managed to reduce food waste and improve the quality of food consumed by its clients; this redesign was done entirely by the affiliates of Feeding America rather by any outside intervention.
The book will achieve three goals. First, it will describe state-of-the-art, inequality-oriented, market design. Second, it will generalize from existing applications to identify domains in which economic design can play an important role in alleviating inequality. Finally, it will point out future directions of economic design research and applications that can benefit the least well- off in society, who are often most affected by the misallocation of societal resources.