Tuesday, July 1, 2008

New Field of Economics - Market Design

The Art of Designing Markets.
By: Roth, Alvin E.,
Harvard Business Review,
October 2007, Vol. 85, Issue 10

A new field of economics, known as "market design," recognizes that well-functioning markets depend on detailed rules.

The aim is to know the workings and requirements of particular markets well enough to fix them when they're broken or to build markets from scratch when they're missing.

Two developments in economics came together to form the field of market design. One was game theory--the study of the "rules of the game" and the strategic behavior that they elicit. By the 1990s it had matured to the point where it could offer practical guidance. In this it was helped by another new methodology, experimental economics, which provided tools both for testing the reliability of game theory's predictions and for testing market designs before introducing them into operating markets. A primary motive for market design is the need to address market failures.

Alvin E. Roth (aroth@hbs.edu) is the George Gund Professor of Economics at Harvard University in Cambridge, Massachusetts, and the George Gund Professor of Economics and Business Administration at Harvard Business School in Boston.

(For papers and links related to market design, visit http://kuznets.fas.harvard.edu/~aroth/alroth.html.)

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