Scott Kominers, Alexander Teytelboym, Vincent Crawford

Market design seeks to translate economic theory and analysis into practical solutions to real-world problems. By redesigning both the rules that guide market transactions and the infrastructure that enables those transactions to take place, market designers can address a broad range of market failures. In this paper, we illustrate the process and power of market design through three examples: the design of medical residency matching programs; a scrip system to allocate food donations to food banks; and the recent “Incentive Auction” that reallocated wireless spectrum from television broadcasters to telecoms. Our lead examples show how effective market design can encourage participation, reduce gaming, and aggregate information, in order to improve liquidity, efficiency, and equity in markets. We also discuss a number of fruitful applications of market design in other areas of economic and public policy.

JEL Codes
D47: Market Design
C78: Bargaining Theory; Matching Theory
D44: Auctions
D82: Asymmetric and Private Information; Mechanism Design
D02: Institutions: Design; Formation; and Operations
D51: Exchange and Production Economies
D71: Social Choice; Clubs; Committees; Associations
D61: Allocative Efficiency; Cost-Benefit Analysis
D62: Externalities
D63: Equity; Justice; Inequality; and Other Normative Criteria and Measurement
allocation rules
market design