Americans Win Economics Nobel For Market Design

Two Americans, Alvin Roth and Lloyd Shapley, have won the 2012 Nobel Prize in Economics. Their research on market design has found many practical applications. It's at the heart of the system used to match medical school graduates with residency programs and is even used in the market that matches human organ donors and recipients.

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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

Time now to hear about what the Nobel committee calls a beautiful example of statistical theory being applied to practical use. That beautiful theory was the work of two American economists: Lloyd Shapley of UCLA and Alvin Roth of Harvard. Today, they won the Nobel Prize for Economics. NPR's Jim Zarroli explains their work in what's called market design.

JIM ZARROLI, BYLINE: The committee said the two men had studied the question of who gets what, how do you match up participants in a market when money isn't an issue. Alvin Roth spoke at a press conference hours after the award was announced.

ALVIN ROTH: Market design more generally is about how we can make marketplaces work better, how we can fix them when they're broken and then develop new ones when they don't exist.

ZARROLI: The field was pioneered by Lloyd Shapley and the late David Gale in the 1960s. They looked into the question of how medical school graduates were assigned to hospitals for residencies. It was a system that often broke down. The residents didn't like the hospitals they were assigned to, and hospitals were unhappy with their residents. Shapley and Gale wanted to design a new selection method that would better match doctors and hospitals and ensure the most stable outcome for everyone involved.

And they came up with what's called the Gale-Shapley algorithm, but it was Roth working independently who learned to apply the algorithm to a lot of real-world situations. Susan Athey is a professor of economics at Harvard and a colleague of Roth's.

SUSAN ATHEY: This is a fantastic prize, and one of the things that I really like about the citation was that they specifically cited out for bringing the theory into practice.

ZARROLI: Over the past few decades, Roth helped advise the school systems in New York and Boston about how to assign students to schools, and he pioneered the New England program for kidney exchange. Before he got involved, it could be difficult for people who needed kidney transplants to find donors. They usually started by turning to a relative or friend, but often, that relative or friend was incompatible, and the transplant couldn't be done. Ruthanne Hanto is with the Organ Procurement and Transplantation Network.

RUTHANNE HANTO: So, I mean, all of those living donors who are incompatible were essentially lost to the system, and no kidneys were donated.

ZARROLI: Roth decided to collect the names of all of the people willing to donate kidneys and put them into a computerized database. The system worked by matching donors with patients they didn't know. You might be incompatible to donate a kidney to your sick sister, but you could donate to a stranger in the database, and in exchange, someone else in the database would donate to your sister. Today, the exchange matches up hundreds of donors and patients each year, sometimes in chains of three or four or more patients. And Hanto says Roth has continued to tweak the system.

HANTO: He looks at the theory and the research, but then he also looks at if we're going to put this theory and this research into practical use, what are the obstacles to doing that. I think that's (unintelligible) for, you know, a researcher.

ZARROLI: At the news conference, Roth noted that lots of the turning points in people's lives, like getting into college or getting married, are actually about matching your desires with someone else's, and understanding how the matching process works is what he and Shapley have spent their careers doing. Jim Zarroli, NPR News, New York.

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