The 2012 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was divided equally between Alvin E. Roth and Lloyd S. Shapley "for the theory of stable allocations and the practice of market design".
Stable allocations – from theory to pratice
This year's Prize concerns a central economic
problem: how to match different agents as well as possible. For example,
students have to be matched with schools, and donors of human organs
with patients in need of a transplant. How can such matching be
accomplished as efficiently as possible? What methods are beneficial to
what groups? The prize rewards two scholars who have answered these
questions on a journey from abstract theory on stable allocations to
practical design of market institutions.
Lloyd Shapley used so-called cooperative game theory
to study and compare different matching methods. A key issue is to
ensure that a matching is stable in the sense that two agents cannot be
found who would prefer each other over their current counterparts.
Shapley and his colleagues derived specific methods – in particular, the
so-called Gale-Shapley algorithm – that always ensure a stable
matching. These methods also limit agents' motives for manipulating the
matching process. Shapley was able to show how the specific design of a
method may systematically benefit one or the other side of the market.
Alvin Roth recognized that Shapley's theoretical
results could clarify the functioning of important markets in practice.
In a series of empirical studies, Roth and his colleagues demonstrated
that stability is the key to understanding the success of particular
market institutions. Roth was later able to substantiate this conclusion
in systematic laboratory experiments. He also helped redesign existing
institutions for matching new doctors with hospitals, students with
schools, and organ donors with patients. These reforms are all based on
the Gale-Shapley algorithm, along with modifications that take into
account specific circumstances and ethical restrictions, such as the
preclusion of side payments.
Even though these two researchers worked independently of one
another, the combination of Shapley's basic theory and Roth's empirical
investigations, experiments and practical design has generated a
flourishing field of research and improved the performance of many
markets. This year's prize is awarded for an outstanding example of
economic engineering.
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