3 Market Design

Itai Ashlagi

Stanford University

3.1 Introduction

A marketplace enables economic transactions between the market participants according to a given set of rules. When a social planner has all the information, traditional operations and optimization can be applied directly to achieve optimal outcomes. But it is often the case that participants hold private information not directly accessible to the planner; engineering the rules (or the strategy sets) carefully is often crucial to allow the market to operate smoothly and reach desired outcomes. Another important piece of market design is paying attention to institutional details, which impose constraints on the planner and hence market outcomes, as in traditional operations.

Researchers have not only developed elegant theories in the area of market design, but also contributed to improving the operations of real marketplaces in collaboration with practitioners. This chapter provides a brief overview of two healthcare marketplaces, the National Residency Matching Program and Kidney Exchange, while emphasizing some of their design issues and ongoing challenges. These marketplaces might seem to be nonstandard due to the lack of monetary transfers or prices, but we shall see that they share some similar economic principles with classic markets.

3.2 Matching Doctors to Residency Programs

3.2.1 Early Days

Every year, thousands of doctors who graduate from medical school start a residency, specialty training, ...

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