Essays in Market Design and Behavioral Economics

Abstract

This dissertation combines insights from market design and behavioral economics in designing conventional and unconventional marketplaces. The first design recognizes that market participants make mistakes in their interactions with market rules. Even in many matching markets which were designed such that revealing one’s true preferences is a simple and optimal strategy, participants’ limited understanding of the matching algorithm can lead them to select an inferior strategy against their own best interests. I propose a redesign of a widely used algorithm to take potential strategic mistakes into account, and make them less costly for the participants and for efficiency of the market. Experimental results show participant decisions under the new design is more aligned with their own interests compared to that of the baseline. The second design focuses on people’s altruistic motivations when they provide goods and services to others in need for free. By conceptualizing this non-traditional economic setting as a market with altruistic supply, we can see the need to clear market demand and supply just like in any market. The lack of a market price, because suppliers are not motivated by monetary compensations, adds to the challenge since a typical market relies on adjustments of the market price to coordinate supplier actions. We propose an alternative mechanism to provide information and coordination for altruistic suppliers, so that individual suppliers make efficient decisions and aggregate supply responds to the demand of those in need. In laboratory experimental markets, our design dramatically shifts supply to follow more closely to demand. This design is then applied to blood donation, a prominent example of a market with altruistic supply. Since pricing a blood donation is viewed as repugnant, volunteer blood donors in developed countries are mostly motivated by altruism rather than monetary incentives. In a field experiment with blood donors, the results show that short-term donation rates are higher, and more responsive to blood shortage appeals among treatment donors compared to that of control donors. These designs and their applications demonstrate how existing market designs might change and how new markets are conceptualized when we take into account more broadly of participant motivations and behaviors. Recognizing intrinsic altruistic motivations of blood donors allow us to view the voluntary blood donation system as a market, and make the ‘market’ more efficient by coordinating donor actions. In other markets economists helped design, participants might behave contrary to their own best interests and sometimes in a way we don’t understand. Explicitly recognizing the potential for ‘mistakes’ enables us to reduce the costs of those who do make mistakes, and improve market outcomes by correcting misallocations due to participant mistakes. These designs are also examples of taking constraints in a market seriously. Repugnance limits the use of incentives in the market for blood and therefore we treat it as a market with altruistic supply. Participants’ ability to understand a market clearing algorithm and to response appropriately to incentives in the algorithm may limit the complexity of a market and calls for the need to account for mistakes in the design.