Friday, November 25, 2016

Remaining Questions and Challenges for Market Design



Very few economic sub-fields have done so well in such little time as has market design. From redesigning school choice to establishing matching markets in kidney to introducing combinatorial auctions of airwaves no other field has so rapidly taken theory to practice and seen it bear immediate fruit. The rest of the economic community took notice and two market designers were awarded the Nobel Prize for their early and profound contributions. One can't help but think that more accolades are due in the next 5-15 years.

However, as I checked back into the field, surveyed the literature and attended an NBER workshop after having taken a multi-year hiatus I couldn't shake the feeling that there are too many unexploited opportunities still out there.....proverbial $20 dollar bills being left on the sidewalk. The picture above is my back-of-the-envelope (whiteboard) sketch of where market design research could go in the next 20 years. 

I was thinking about the effects on agents under the regimes of different market institutions and wonder where are the papers that show those economic effects and trade-offs. I imagined several small rivers (representing agents making decisions before entering the market) that slowly flow downstream, then converge into a lake (representing the market mechanism) that feeds into larger rivers (representing the different agents and the results of their transactions). My questions centered around what happens downstream or after the transaction and how does behavior change upstream prior to deciding when and if to enter the market. 

Stepping into the political landmines of school choice, market designers long ago implemented mechanisms in several large school markets that are stable and safe for parents to express their true preferences without requiring specialized knowledge about the process. But, are these children performing any better after having been placed in schools that are more preferred by their parents? Did the mechanism induce parents to switch from private schools back to public schools or vice versa? Making parents happy and building trust in a public school system is not nothing but the administration of the mechanism that matches students to schools isn't free either. Is it worth it in economic terms? What's the payoff? 

Combinatorial spectral auctions of airwaves vastly increased sales revenue for the government and helped firms narrowly target consumers but what was the downstream effect after the auction Were media companies better able to develop and grow their markets? How did t.v. and radio advertisements change before and after the introduction of the combinatorial auction?

Looking upstream, it seems important to think about how people's investments in human capital differ knowing they will enter a labor matching market under one set of rules versus another. How do different mechanisms affect an agent's decision to participate and when to enter? One gap in the research is the case of dynamic markets where the market clears over time or is continuously attempting to clear. For school choice or doctors matching to a residency program the problem is essentially one-and-done from the perspective of the student and the doctors. Once they match, they presumably go on their way and never deal with the market mechanism again. However, in some markets, like the military, agents will enter the internal market for a new job every three years.  

Looking at all these unasked and unanswered questions I realize that part of the reason for this is simply a resource allocation issue. The number of researchers and grad students thinking deeply about market design is small in absolute terms (probably ~100) and infinitesimal compared to finance, labor or development (10-1 or 100-1?). Still, almost all of the papers that I've read in the past and present focus exclusively on developing the theoretical understanding of market allocation mechanisms under different conditions such as preferences, information and supply constraints. Only time will tell if those deeper lines of research are valuable or not but it seems that there is still a lot of lower-hanging fruit left on the tree of knowledge.     

Friday, July 15, 2016

What I'm Learning in 2016, Part I

I decided to change the title from Reading to Learning because not all knowledge comes out of books, right? And I have the time to make an update now instead of waiting until the end of the year. I figure that I'll break up the big post into smaller ones.



POLITICAL ECONOMY


Politics and Economics of International Energy-Sciences Po 
This is a Coursera-hosted MOOC that was easily digestible and while neither rigorous nor difficult it was very useful to this novice. It helped me understand where we are and where we're heading with respect to global energy consumption and the promises and challenges of different energy sources. Prior to the course, I had a sense that the gas and oil the US is extracting via hydraulic fracking methods had immense importance geopolitically, but I wasn't clear about much else. For instance, I had no idea that there were 100 nuclear energy plants in the USA, that the difficulty of transporting natural gas is what allows Russia to leverage it's vast natural gas production against Europe, and the challenges of integrating different energy sources, particularly renewables, into an electrical grid.    




Knowledge and Decisions-Thomas Sowell
Dr. Sowell is an intellectual giant but I couldn't get through this tomb. I think that says more about my mental inferiority than his writing. It's dense, the ideas are profound and his examples are thorough. At the core Dr. Sowell is a Hayekian thinker and one can read FA Hayek's 1945 masterpiece The Use of Knowledge in Society throughout, or at least as far as I got (halfway). Dr. Sowell's point is that the most important problem for a large political body is the question of"who makes the decision, under what constraints, and subject to what feedback mechanisms.” He explores this question in the social, economic, political and legal realms to illustrate the problems of having individuals without knowledge and without constraint making decisions without consequences. The trend is clear and universal; more and more decisions are being centralized into powerful bodies that do not have knowledge of local conditions and won't ever feel the effect of their decision. It's not difficult to imagine the issues of incentives here and the expectation of poor and worsening outcomes.   


POWER AND VIOLENCE



Holy cow, this MVL novel is a tour de force of violence, exploitation, evil, the darkest side of humanity and effects of European colonization in early 20th century Congo and Peru. The story follows Roger Casement, British diplomat, who is deeply affected personally and politically by what he sees abroad. I read this in Spanish but I imagine the English version is just as good. At one point Roger says “Cuando se agotan las explicaciones históricas, sociológicas, psicológicas, culturales, queda todavía un vasto campo en la tinieblas para llegar a la raíz de la maldad de los seres humanos, Bulldog. Si lo quieres entender, hay solo un camino: dejar de razonar y acudir a la religión, eso es el pecado original" (translated: When they run out of historical, sociological, psychological, and cultural explanations there will be a vast space in the fog to arrive at the root of human evil, Bulldog. If you want to understand, there's only one way; stop reasoning and turn to religion, original sin."




Brilliant and raw. This is the non-fiction version of Marlantes' novel Matterhorn. He captures the feeling or pulse of the American warrior. I can think of one other person, journalist Sebastian Junger, who can communicate the ethos and pathos of the military service members who have experienced war. The problem with the modern American way of war is that we train our young (mostly) men to kill without blinking, strip away their sense of self in order to create a cohesive small group identity and throw them into the most extreme circumstances that will force them to choose between moral virtues. And then we have no process to reintegrate these warriors back into our polite liberal tolerant society. There's no recognition that however these young people have changed or been hurt, we are responsible for it.         






I've benefited greatly from Coates' writing in The Atlantic magazine. He has been a intellectual force in arguing that the condition and treatment of black men and women in America is no accident but by design of historical policies. I don't agree with everything he writes but I'm better off for having engaged his work. That said I didn't get much out of this short and heavily celebrated-by-liberals book. It's a very lamenting, pessimistic yet loving letter to his black son. Thorough RR Reno critique in First Things journal but it's a critique that loses some of its power in the wake of the recent police shootings of young black men (and children). Coates' point is that today and everyday since the founding of America the black body has been devalued.   


INTERNATIONAL AFFAIRS


Written by a career-China scholar who worked at the State Department and Department of Defense this book is an eyes-wide-open assessment of the Chinese government's intentions and actions vis-a-vis the United States and the international community. From a former Panda hugger turned realist, the situation is extremely dangerous and made more so by America unwillingness to see and name Chinese aggression. Throughout the book we can see the realist v. internationalist perspectives playing out as US diplomats and politicians thought they could simultaneously put a wedge in between Russia and China and pull China into the international system to provide guardrails to its behavior. As we saw this week, China has completely rejected the UN's ruling on the South China Sea sovereignty issues and the infamous nine-dash-line that represents China's vast claim in the South China Sea.  




For several decades, Iran has tried to undermine US influence in Latin America. By strengthening economic, political and cultural ties to the region Iran has increased its access and partnered with key US adversaries in Hugo Chavez, Rafael Correa, Cristina Kirshner, Evo Morales and of course Raul Castro. The size of the threat and the trend are difficult to assess and the book is inconclusive. The chapters of the book tend to turn over and over the same pieces of evidence such as the 1992/1994 terrorist bombings in Buenos Aires which targeted Jews and the state of Israel. The later chapters that focus on money laundering and the access given to Iranian military and intelligence operatives convinced me that this was more threat than nuisance.  


GREAT WRITING



From the back cover "Why would you read a six-volume, 3,600 page Norwegian novel about a man writing a six-volume, 3,600 page Norwegian novel? The short answer is that it is breathtakingly good, and so you cannot stop yourself, and would not want to....Arrestingly beautiful." NYT Book Review
The longer answer is that the prose is absolutely amazing and soaring. Knausgaard describes the routine and the spectacular with the same intricate detail that most of us miss. The book holds the alternate title "A Man In Love" and this is the life he presents us, how he met his wife, Linda, their ups and downs, his children and his feelings for them. He struggles with the restrains and obligations of his life seeing both comfort and imprisonment in them. The honesty and frankness with which he discusses his life, his friends and family is voyeuristic. This isn't a character in a novel but an extremely complicated person who lets us into his thoughts and contradictions where we can recognize ourselves and our struggles.




VIRTURE AND MORALITY





I read Black Beauty-Anna Sewell and Heidi-Johanna Spyri to my oldest daughter, who reads herself but still enjoys evening story time. Like Anne of Green Gables (last year) I deeply appreciated both of these stories and it is abundantly clear why they are classics. These stories are overtly moralistic but in the best possible way. The books celebrate virtues like honestly, respect, kindness, wisdom, selflessness, etc. as well as God, faith and nature. My daughter and I had several lengthy conversations sparked by the events in the stories and the virtues and vices of the different characters. The true beauty of the two stories is that they steer clear of divisive moral issues and keep the story firmly planted in mostly universal values that we could all agree on. And that made me think that most modern human suffering is due to lack of basic morality and virtue and not necessairly disease, war and material need.     







Sent to me by rising think-tank star, Gonzalo Schwarz of the Atlas Network, this is a book about strategic communications and how conservatives are failing to share their moral and political vision with the American people. Instead of empathizing with voter's concerns, conservatives wonk out on policy details or worse fail to explain how freedom, liberty and self-determination is going to help people pay their bills, keep streets safe and drive down college tuition. Free enterprise and lower taxes are important but a struggling family can't eat those concepts. It's a call back to compassionate conservatism but maybe without the big spending of the early Bush 43 administration.