Alvin Roth, a Nobel prize winner in economics, has spent most of his career working in a critical area of economics which is often overlooked or taken for granted, market design. Market design represents the principles and rules that define or govern markets. In his book Who Gets What - and Why, Roth presents the key concepts of market design in a very readable book with key examples. If the design is not correct, there will be market failure.
Matching engines, the essence of market design, are only effective if participation is safe and simple, yet simple to use is not often simple to create. The wrong rules will create an imbalance between buyers and sellers who will then look for an alternative. Good market design allows for effective matching without congestion or bias.
Think of all the rules associated with a futures exchange or stock trading. The centralized market allows for the better matching of buyers and sellers and the creation of liquidity. It is a place of price discovery and signaling if done correctly. A good market design can create a better market and eliminate inequities and inefficiency. We may think about exchanges, but design solutions can be created for matching kidneys donors with those in need, medical doctors with residences, or students with school choice. The next time you think about a market, think about the design and how it achieves better or worse outcomes.
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