Why markets fail — and how to fix them (ft. Nobel economist Alvin Roth)

**Alvin Roth** (0:00)
One of the things about market design is you think in advance about what you're going to do.

**Scott Kominers** (0:04)
A lot of economics asks, how does the world work? And market design gives the opportunity to ask, how should the world work?

**Tim Roughgarden** (0:10)
Many systems from kidney exchange to school choice would fall apart without good market design.

**Alvin Roth** (0:16)
There's 130,000 people who experience, for the first time, kidney failure each year, but we only do about under 30,000 transplants a year. Most people who need a transplant die without getting one.

**Tim Roughgarden** (0:27)
The challenge is to build systems to produce good outcomes even when participants have competing incentives.

**Alvin Roth** (0:34)
A lot of kidney exchanges now are done non-simultaneously in non-directed donor chains. People who wanted to give a kidney to someone and didn't have anyone particular in mind. And so they allow us to organize a chain that doesn't have to loop back to the beginning. And in that chain, every patient donor pair can get a kidney before they give one.

**Tim Roughgarden** (1:04)
Hi, everyone, and welcome to First Principles, a series by the team at a16z crypto. I'm Tim Roughgarden, I'm the head of research at a16z crypto. And today, we're talking about market design, the careful engineering of efficient marketplaces. Many systems from kidney exchange to school choice would fall apart without good market design. The challenge is to build systems that produce good outcomes even when participants have competing incentives, a problem that's central to markets, including those familiar to us in crypto. Our guest is Dr. Alvin Roth, the Nobel laureate in economics and Stanford professor, who is one of the pioneers of market design. And I'm also joined by Scott Kominers, a professor at Harvard Business School and a research partner here at a16z crypto, and as it happens, a former student of Al's.
Together, we explore how economic theory becomes practical market design. From New York City high school admissions, to kidney exchange, and how technology changes marketplaces, as well as the idea of repugnant transactions, which is a theme in Al's soon to be published book, Moral Economics. Here's our conversation.
So Scott, we get to interview Al Roth, which is very exciting. I imagine this is particularly meaningful for you, given that you were a PhD advisor of his back in the Harvard days.

**Scott Kominers** (2:28)
Oh, yeah. And in fact, I first met him as an undergraduate. The summer before I took his market design class, I was reviewing papers for this central blot math. It's one of these sort of like large scale math reviewing programs where they're trying to summarize every single math paper ever written. It's an incredible Herculean project. And I was at the time one of the people who was writing summaries for this one of the thousands and thousands. I was reviewing number theory papers and some of those were like, sort of very run of the mill. I was getting like the tier one game theory papers sent. And I got this article, I think it was Deferred Acceptance Algorithms, History, Theory, Practice and Open Questions. It was a survey article that had come out earlier that year. And was about the use of this thing called the Deferred Acceptance Algorithm, which is an algorithm for finding stable matchings, matchings where nobody has any incentive to try and recontract after the fact. And the article took you through this beautiful mathematical theory and then into practice, how this was used in the assignment of doctors to their medical residencies, how it was starting to be used in school choice, and, you know, and tangentially sort of like how it also related to organ allocation and saving lives through kidney exchange, you know, all this incredible stuff. And I was like, oh my God, this is the coolest thing ever. I have to learn more about it. And then I realized that the author taught at Harvard was Al Roth. He's at Stanford now, but at the time he was at Harvard. And I had never heard of him. I didn't know anything about this. But I checked the courses of instruction and would behold, he was teaching a graduate market design seminar that fall, so I walked in. And I tell you, the first 45 minutes of that class, I knew this was what I was going to do. And Al crystallized this set of ideas with like, what in retrospect was the simplest, but to me has always been the most profound thing I think I've ever learned about economics, which is that economics is a way of thinking about the world. But economics is a descriptive science and a tool kit for reasoning about incentives and markets and behavior.