Trading kidneys, repugnant markets and stable marriages win the Nobel Prize in Economics

Roth and Shapley charted a course for economists to go beyond simply arguing for markets in everything.

The 2012 Nobel Prize in Economics - technically the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, but nobody cares - has been awarded to two American Economists, Alvin Roth and Lloyd Shapley "for the theory of stable allocations and the practice of market design". The Nobel Committee explains what that means:

This year's Prize concerns a central economic problem: how to match different agents as well as possible. For example, students have to be matched with schools, and donors of human organs with patients in need of a transplant. How can such matching be accomplished as efficiently as possible? What methods are beneficial to what groups? The prize rewards two scholars who have answered these questions on a journey from abstract theory on stable allocations to practical design of market institutions.

Lloyd Shapley used so-called cooperative game theory to study and compare different matching methods. A key issue is to ensure that a matching is stable in the sense that two agents cannot be found who would prefer each other over their current counterparts. Shapley and his colleagues derived specific methods – in particular, the so-called Gale-Shapley algorithm – that always ensure a stable matching. These methods also limit agents' motives for manipulating the matching process. Shapley was able to show how the specific design of a method may systematically benefit one or the other side of the market.

Alvin Roth recognized that Shapley's theoretical results could clarify the functioning of important markets in practice. In a series of empirical studies, Roth and his colleagues demonstrated that stability is the key to understanding the success of particular market institutions. Roth was later able to substantiate this conclusion in systematic laboratory experiments. He also helped redesign existing institutions for matching new doctors with hospitals, students with schools, and organ donors with patients. These reforms are all based on the Gale-Shapley algorithm, along with modifications that take into account specific circumstances and ethical restrictions, such as the preclusion of side payments.

Even though these two researchers worked independently of one another, the combination of Shapley's basic theory and Roth's empirical investigations, experiments and practical design has generated a flourishing field of research and improved the performance of many markets. This year's prize is awarded for an outstanding example of economic engineering.

The committee have yet again reaffirmed the old adage that the most important thing to do when trying for a nobel prize is to live long enough that your achievements are recognised. The Gale-Shapley algorithm, for instance, was devised in 1962, when Lloyd Shapley was 34. It concerns a maths problem known as the stable marriage problem: if you have an even number of men and women, can you always come up with a set of marriages where there are no two people of opposite sex who would both rather have each other than their current partners? (1960s maths problems: usually heteronormative.) If you can, then the marriage is "stable".

The Gale-Shapley algorithm is a way of always ensuring stable matches; and much of Shapley's work covers the same areas, straddling the boundaries between economics, mathematics, and computer science.

Roth is the younger of the two winners, and works in a far more empirical sphere. As the committee points out, although the two men never actually collaberated, Roth took Shapley's theoretical work and applied it to actually existing markets. For instance, Roth used the Gale-Shapley agorithm to ease the kidney shortage in the US. David Wessel explains (£):

As of noon yesterday, 58,470 people in the U.S. were waiting for a kidney transplant. Most won't get one this year. There aren't enough donated kidneys to go around. Surgeons transplanted just 15,129 kidneys last year. Now a band of transplant surgeons and economists are trying to fix that by creating a moneyless market for exchanging kidneys. Most transplanted kidneys come from a person who has died, a supply that grows slowly because of ignorance about the need for donations or grieving relatives' reluctance. But a kidney taken from a live donor works better, and almost everyone has a spare. As techniques improve for removing healthy kidneys and for suppressing the body's tendency to reject a transplant, doctors increasingly turn to kidneys from living donors, usually relatives. Last year, 43% of kidneys transplanted in the U.S. came from living donors, up from 28% a decade ago. But a biological barrier often blocks a transplant from a relative. In about a third of all would-be pairs, blood types are incompatible. In others, the sick person has antibodies that can initiate a rejection of the donated organ. It's heartbreaking "to have the treasure of the live donor and then have that not go forward because of a biological obstacle," says Massachusetts General Hospital transplant surgeon Francis DelMonico.

Occasionally, transplant centers spot a way out: One New England father with blood type A couldn't donate a kidney to his daughter with blood type B. So he gave a kidney to a teenager with blood type A, and the teenager's sister gave a kidney for the man's daughter. New England's transplant centers have done six such exchanges. Baltimore's Johns Hopkins University has done seven.

The crucial thing about Roth's work, from an economic point of view, is that it involves finding stable allocations using market-like situations without involving money. The kidney swaps in the New England situation are market-like, trading kidneys for kidneys in a way that makes all parties better-off, but they don't actually require kidneys to be bought and sold.

We can see the importance of this by looking at another paper of Roth's, not cited by the committee, on repugnance in markets (pdf). Roth demonstrates that some markets are limited because the very existance of a market in some goods is considered repugnant. He argues, for instance, that the trade in horse meat being banned in California is not done through fears that eating horse meat is unsafe; nor is it done for animal welfare reasons, since it is still legal to farm and kill horses. But banned it is, and Roth argues that the natural response of economists to situations of this type - to argue for freer markets - is wrong, since it ignores the very strong feelings involved in the situation. Instead:

Being aware of the sources of repugnance can only help make such discussions more productive, not least because it can help separate the issues that are fundamentally empirical—like the degree of crowding out of altruistic donations that might result from different incentive schemes compared to how much new supply might be produced—from areas of disagreement that are not primarily empirical.

Hopefully his new Nobel Prize should give that argument greater weight in the years ahead.

A patient receives a kidney in Johns Hopkins university in Baltimore. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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A small dose of facts could transform Britain's immigration debate

While "myth-busting" doesn't always work, there is an appetite for a better informed conversation than the one we're having now. 

For some time opinion polls have shown that the public sees immigration as one of the most important issues facing Britain. At the same time, public understanding of the economic and social impacts of immigration is poor and strongly influenced by the media: people consistently over-estimate the proportion of the population born outside the UK and know little about policy measures such as the cap on skilled non-EU migration. The public gets it wrong on other issues too - on teenage pregnancy, the Muslim population of the UK and benefit fraud to name just three. However, in the case of immigration, the strength of public opinion has led governments and political parties to reformulate policies and rules. Theresa May said she was cracking down on “health tourists” not because of any evidence they exist but because of public “feeling”. Immigration was of course a key factor in David Cameron’s decision to call a referendum on the UK’s membership with the EU and has been central to his current renegotiations.  

Do immigration facts always make us more stubborn and confused?

The question of how to both improve public understanding and raise the low quality of the immigration debate has been exercising the minds of those with a policy and research interest in the issue. Could the use of facts address misconceptions, improve the abysmally low quality of the debate and bring evidence to policy making? The respected think tank British Future rightly warns of the dangers associated with excessive reliance on statistical and economic evidence. Their own research finds that it leaves people hardened and confused. Where does that leave those of us who believe in informed debate and evidence based policy? Can a more limited use of facts help improve understandings and raise the quality of the debate?

My colleagues Jonathan Portes and Nathan Hudson-Sharp and I set out to look at whether attitudes towards immigration can be influenced by evidence, presented in a simple and straightforward way. We scripted a short video animation in a cartoon format conveying some statistics and simple messages taken from research findings on the economic and social impacts of immigration.

Targeted at a wide audience, we framed the video within a ‘cost-benefit’ narrative, showing the economic benefits through migrants’ skills and taxes and the (limited) impact on services. A pilot was shown to focus groups attended separately by the general public, school pupils studying ‘A’ level economics and employers.

Some statistics are useful

To some extent our findings confirm that the public is not very interested in big statistics, such as the number of migrants in the UK. But our respondents did find some statistics useful. These included rates of benefit claims among migrants, effects on wages, effects on jobs and the economic contribution of migrants through taxes. They also wanted more information from which to answer their own questions about immigration. These related to a number of current narratives around selective migration versus free movement, ‘welfare tourism’ and the idea that our services are under strain.

Our research suggests that statistics can play a useful role in the immigration debate when linked closely to specific issues that are of direct concern to the public. There is a role for careful and accurate explanation of the evidence, and indeed there is considerable demand for this among people who are interested in immigration but do not have strong preconceptions. At the same time, there was a clear message from the focus groups that statistics should be kept simple. Participants also wanted to be sure that the statistics they were given were from credible and unbiased sources.

The public is ready for a more sophisticated public debate on immigration

The appetite for facts and interest in having an informed debate was clear, but can views be changed through fact-based evidence? We found that when situated within a facts-based discussion, our participants questioned some common misconceptions about the impact of immigration on jobs, pay and services. Participants saw the ‘costs and benefits’ narrative of the video as meaningful, responding particularly to the message that immigrants contribute to their costs through paying taxes. They also talked of a range of other economic, social and cultural contributions. But they also felt that those impacts were not the full story. They were also concerned about the perceived impact of immigration on communities, where issues become more complex, subjective and intangible for statistics to be used in a meaningful way.

Opinion poll findings are often taken as proof that the public cannot have a sensible discussion on immigration and the debate is frequently described as ‘toxic’. But our research suggests that behind headline figures showing concern for its scale there may be both a more nuanced set of views and a real appetite for informed discussion. A small dose of statistics might just help to detoxify the debate. With immigration a deciding factor in how people cast their vote in the forthcoming referendum there can be no better time to try.