Today they awarded the 2012 Nobel Prize in Economics to Lloyd Shapley and Alvin Roth for their work on match making theory. One of the main goals of economics is to study "markets where prices adjust so that demand equals supply". However, there are certain markets where prices do not adjust and it is either impossible or ethically wrong to allocate resources through price mechanisms (eg. organ donor markets). Given that in this type of markets prices, which have proven to be an excellent match making instrument, can't be used, the question is how do you create a stable match between supply and demand? That's when their work comes in to reshape Economics.
Lloyd Shapley contributed to their work mainly from a theoretical standpoint. What he argues is that if individuals are rational and they engage in simple, unrestricted mutual trade, then the outcome should be efficient (everyone is satisfied with their pairing). Lloyd created an algorithm that "always lead to stable matching."
Roth, set out to test and improve this algorithm by working together with the National Resident Matching Program. His worked not only solved for the existing manipulation problem in Shapley's work, but it also allows the match making of over 20,000 positions per year. In addition, both Roth and Shapley have applied their algorithms to markets such as high-schools and students, kidneys and patients.
Not surprisingly, both authors are currently working in expanding their algorithms and including prices in them. What would the ramifications of creating such algorithm be? If we find a substitute for prices that take into account our individual preferences would be reach a Pareto optimal point? If not, their work has offered great insight to markets where matching supply and demand was previously a problem.
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