US academics Alvin Roth and Lloyd Shapley won the Nobel Prize in Economics yesterday for their work on the functioning of markets and how best to match supply and demand.
The work by Roth and Shapley helps match donors of human organs with patients in need of a transplant, or students with universities, or Internet search engines that auction out space for advertisers.
The two were honored for “the theory of stable allocations and the practice of market design,” said the Royal Swedish Academy of Sciences, which picks the winner.
Resources are often allocated through a pricing mechanism: High oil prices give consumers an incentive to conserve energy, and high wages attract workers to a particular profession.
However, in many markets, pricing is not enough to match different agents. Money is not the only factor that decides which hospital a doctor wants to work in, or which university would be best for a prospective student.
Central to their work is the idea of stability: the allocation where no individuals perceive any gains from further activity.
In a 1962 paper, Shapley applied the idea of stability to that of marriage, looking into how individuals in a group of people could be paired up despite their conflicting views on who would be their best match.
The best match-making was achieved by using what is now known as the Gale-Shapley “deferred acceptance” algorithm, a set of rules that aims to achieve a stable solution.