What is Market Design

Proponents of game theory, a branch of economics, have developed methods for analyzing people’s interests and applied them to a range of social and economic problems. Over the years, researchers have gained a deep understanding of how people behave under given systems of rules, often referred to as the rules of the game.

While game theory has matured into a discipline that explains rational human behavior under given rules, a new field that seeks to reverse this approach has also emerged. This field aims to implement theoretical institutional designs into real-world scenarios by asking “What kind of system or game rules should we design to achieve desirable outcomes for people?” This field of study is called market design.

As noted in the “overview” document, names of theories don’t need to be capitalized. You could also omit the quotation marks here, but it’s okay to include them at the first instance of the term.

Market design, by its nature, excels at solving incentive design problems in a way that encourages participants in a system to take actions of their own accord that are desirable for society as a whole.

For example, consider an internal personnel system that operates according to the rule: To ensure people’s wishes are respected, employees will be assigned to one of the departments they have expressed interest in. At first glance, this may seem like a reasonable system, but it creates an incentive for employees to lie by, for instance, pretending they only want to join a specific department, even when they are actually open to being assigned to others, in hopes of being placed in the department for which they have a higher preference. This could result in assignments that do not reflect the true preferences of employees.

Another example is the chaos that arose around people trying to make appointments to receive the COVID-19 vaccine. Because bookings were taken on a first-come, first-served basis, systems were inundated with people eager to get vaccinated, and this led to phone line and server outages across Japan. The outcome was that individuals, by acting optimally within the given rules, unintentionally created unnecessary costs.

With advancements in market design research, these issues can now be resolved through an engineering approach based on social science insights. Our goal is to design and implement the most appropriate systems, taking into account practical constraints and other relevant factors.