2381 FBF: Alvin E. Roth - Who Gets What and Why, The New Economics of Matchmaking & Market Design

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With the complete solution for real estate investors. Welcome to the Creating Wealth Show. This is your host, Jason Hartman. And thank you so much for joining us Today, listeners from 164 countries around the world. It's so great to have you here with us as we talk about creating wealth through the most historically proven asset class in the entire world, income property. And today our guest will be Alvin E. Roth. I became familiar with his book several months ago and found it to be very interesting. It's entitled who Gets what? And the New Economics of Matchmaking and Market Design. Quite fascinating. I don't know if I smoked really all of it out in the interview, but the book was great. So, so we'll see what you think after listening to the interview. But interesting topic, you know, to understand how an economy distributes resources and why it does, you know, people invariably think, you know, that the world is unfair, that the world owes them a living, that they should get as much as someone else has. And you know, they certainly have their reasons for this. And it's interesting and this is know really by no means a political book or a political discussion in the interview today because a lot of that of course is influenced by politics of, you know, the left and the right and socialism and wealth redistribution and so forth. But you know, he talks a lot about, in the, in the book about organ donations and how organs are distributed, you know, when someone needs a new kidney, for example. Really interesting. And by the way, to that end, I read two articles about ISIS recently that were just Gruesome and scary, but fascinating at the same time. One was showing how they make over $1 billion a year. And it basically breaks down that they're, they're making about $600 million a year from oil or maybe that's 300 million. I don't know. I might have that reversed. You know, minor detail. It's like government accounting, you know, minor detail. A trillion here, a trillion there, no big deal. Then they make another 300 million from taxation and fund fining people that live in the ISIS controlled territories. They make another $60 million a year or so just on ransoms by kidnapping people. So there you go. There's the breakdown of how you make a billion dollars if you're isis or as Obama says, isil. Why does he call it that, by the way? You know, what, what, what is that all about? It just seems like it's intentionally, like he's intentionally trying to confuse people. But that's neither here nor there. Before we get to our guest today, you know, I'm super excited to announce that we have the founder and CEO of Cozy. Yes, that's Gino. You may have heard that interview on the show and also the interview of his co founder on the show as well. And he will be speaking at our upcoming Meet the Masters event that's coming up really quick. And he will also be joining us for the VIP dinner. That's going to be a great topic. And again, you know, we're kind of sticking with a theme this year of empowerment, of empowering the investor to, to have control over their destiny, to not relinquish much control unless they want to, if they want a more laissez faire investment, but really to kind of get away from the grip of the property manager. Now when we compare income, property to things like Wall street or investing in a fund or any kind of pooled asset class. And by the way, yours truly just got ripped off in another one of those. Yes, I do have some risk capital and I screw around with little things here and there. I don't recommend that you do it, but, you know, I kind of figure that I'm a little bit of a lab for you, my listeners and clients. So I invest in some things. I invested in a couple of. Well, I don't know, I'm gonna talk about that later. I'm gonna, I'm gonna ferret this out for you and I'm gonna tell you about my ripoff stories where I got ripped off. I've told you about some of them before. Of course. I talked to you about the tax lien company, Pip west, or pip, otherwise known as Platinum Investment Properties. And Charles Sells. S E L L S Sells, yes. Who is seemingly ripping people off. Episode number 417. I think he ripped me off. Then I had another guy that came forward recently who said he ripped him off. Well, and you know, when you, when you, when you put something up there and expose these guys, a lot, a lot of people come out of the woodwork and you just, you know, it's like that old saying, where there's smoke, there is fire. Where there's smoke, there's fire. So it's amazing. It's amazing. The SEC had all the warnings about Bernie Madoff and they just didn't do anything about it. You know, there were many people that came forward and years earlier saying he's running a Ponzi scheme, this is a scam. And the SEC completely ignored it, quite possibly because of Bernie Madoff's resume. You know, I mean he was, he was the president of nasdaq. He was involved and networked and integrated with, you know, some of the most powerful people really in the world. If, you know, certainly in the financial world, maybe not the world in general, but, but you know, the SEC just kind of looked the other way. So it's, you know, and he was running the biggest Ponzi scheme ever. You know, what was it like 55 billion with a B. $55 billion or something. It's insane. So a lot of these people promoting these funds and these, you know, types of investments, they'll be eventually caught. But you know, many times it doesn't happen for 10, 20, even 30 years. My ex girlfriend's in laws, her mother and father in law, you know, they invested with Bernie Madoff and lost a bunch of money. Basically, you know, their entire retirement nest egg was lost with that. So be careful. You know, when you got these people out there promoting these investments, whether they're a real estate based deal or whatever they are, be really careful. I mean the, the, the crooks and the scammers are everywhere. It's just mind boggling how, how prolific this is. Anyway, it's kind of another topic, but. So what were we talking about? Oh yeah, I want to get into. Before we get to our guest, I want to talk to you a little bit about a really interesting article that I read on a website called easylandlord forms.com welcome to this week's edition of Flashback Friday.

Your opportunity to get some good review.

By listening to episodes from the past.

That Jason has hand picked to help you today in the present and propel.

You into the future. Enjoy. I like this website. There's some great stuff there. And you know what? I will work on getting the founder of this website on the show. But this article, published by Julie Malinowski, I believe I'm pronouncing that correctly. Talking about six trends among landlords and tips to outperform the norm. And this is citing. And by the way, pardon my nasal sound. I'm a little bit stuffed up here. Excuse me. You know, I haven't been sick in a few years, but this season, you know, it's been about three times. I think I'm just running around too much. And I do not like cold weather. That's. That's another thing. And it is freezing here in La Jolla, in San Diego, and it was freezing in Scottsdale, where I was for Christmas. But wow, it's just, you know, it's freezing everywhere. Our two of our venture alliance members, Neil and Elizabeth, they were smart. They went to Key west for the holiday. That. That was probably the best. The best bet, I think. Neil and Elizabeth, I'm copying your idea next year. I think that was a great idea. Okay, so this survey talks. It's a survey they did of 500 property managers accounting for thousands of properties and hundreds of thousands of individual rental units. This survey has been done for seven years now, and it's pretty compelling. I mean, you're going to like what you hear here, most of it, at least. So check this out. They identified these six trends. And the first one is you've raised your rent. According to the report, 88% of property managers raised the rent in the past year. This confirms the U.S. census Bureau data which reveals the median asking price of rent continues to steadily climb. The current average of $802. Remember, this is totally nationwide, so it includes BFE. Where is. What is BFE? Bum F. Egypt. Right. You know, you've heard that expression, right? This is a family show, so we don't swear on the show, but yeah, so it includes everywhere. So, you know, this is the nationwide average of $802, up from $756 in 2014. I would say for our listeners, our clients, you know, the people that go to jasonhartman.com and purchase properties through our network, their average is probably somewhere in the thousand to $1,100 range. Just anecdotally, I would say that's the average of our clients because we like to do the properties that are a little better. Class A and B type properties. We do have the Class C properties. A lot of our listeners and clients want those. We try to get them into more of the Class A stuff. And I've talked about that many times before the Class A or B just, you know, usually an easier experience. But anyway, this is the nationwide average, right? Okay, so. And that's nearly double what it was 20 years ago. Okay, so rents go up. That's good news, right? For managers, it looks like it's. The article goes on to say it looks like this Trend will continue. 68% of those surveyed expect rental rates to increase by. You ready for this? This is phenomenal. You're gonna love it. By 8% next year. 8%, what is that? About 400% of the quoted official inflation rate. That's like four times the rate of inflation that rents will increase. That is phenomenal. Okay, so the tip here is your rent should remain appropriate for your property in the market. You know, find out. You know, do the comps, blah, blah, blah. That's sort of obvious. Our listeners are too advanced to need me to even explain that. Right. That's what we're here to help you with. Okay, number two, you've experienced fewer vacancies. Hey, more good news. According to the U.S. census Bureau report that rental vacancy rates inched upwards a half of a percent to 7.03% in the third quarter of 2015. But they're also down slightly from where they were a year ago. Vacancy rates overall have continued on a downward trend for the past five years. In fact, you'd have to go back. Now, get this. You'd have to go back to 1989. Yeah, 1989. To find the same 6.8% vacancy rate experienced in the second quarter of this year. Folks, on our performers, if you go to jasonhartman.com and you look at the Property Performas, you will see that we quote an 8% vacancy rate higher than both of these numbers here. They say that the Census Bureau was 7.3% in the third quarter and 6.8% in the second quarter. So again, that's. I mean, you know, we are very conservative with our numbers. At least we try to be. You know, a lot of our local market specialists and the other promoters out there that compete with our network, you know, they want to say, oh, there's no vacancy. You know, you got a rent guarantee? Well, you know, we've talked about that on prior episodes. Right. Anyway, we don't need to go into that subject here, but. But again, we try to be conservative on these numbers, and we are quoting an 8% vacancy. Okay, number three, you are renting to a millennial. A millennial, a generation Y person. Again, talked about this many times before in prior episodes, but the largest demographic cohort in American history, larger than the baby boomers by a slight margin of about 4 million people. A huge impact. They're saddled with student loan debt. The employment market is anemic thanks to all these idiotic socialist policies that we have. And they're going to be renters for a long time. They're delaying marriage, they're putting off family formation. You know, they're not having kids as early, they're not getting married as early. So this is a huge rental market. The demographics coming at the rental market over the next decade are nothing short of phenomenal. Quite possibly the best they've ever been in world history. Yes, I'm going to be that bold to make that statement. It is pretty darn phenomenal. Okay, so anyway, I don't need to talk about millennials. We've exhausted. We've done that ad nauseam on prior episodes. Okay, number four, you're getting your current renters to stick around. Now, I've talked about this before too, of course, at the risk of repeating myself, try and do two year leases on your properties. You can do a two year lease with a rent increase on the second year. So if your property is renting for $1,000 per month, you can say, you know, you'll get it for the first year for $1,000 and the second year for $1,040. Now, according to this survey, you should be able to get $1,080 the second year. So, you know, negotiate whatever you can, but try and do the two year leases on your property. I find that this will minimize your tenant turns and, you know, tenants can try to break lease, of course, but I think that's a pretty good deal to do a two year lease. Okay? So I'd recommend that again, people are sticking around, they're not moving as often. So that's good for us as landlords, right? Okay, number five. Now this is a funny one. It's kind of counterintuitive. You're not being more selective in choosing your renters. This one is like a non sequitur, right? Okay, here's what the article says. It says, with rent demand soaring, you might expect that landlords are being pickier in selecting and screening tenants. The Rent.com survey, however, suggests otherwise.

Fear.

56% of property managers said they haven't become choosier despite the high Demand for rental properties. In fact, only 17% reported that they're more selective. Perhaps the glut of available tenants have made landlords lazy and unwilling to properly screen tenants for high credit scores, high income to rent ratios and and excellent rental histories. So again, at the upcoming Meet the Masters event just a couple weeks away, we're going to go into this and this is going to be something you want to do. The tip in the article goes on to say tenant screening is always a good idea. The overall upward swing in rents has meant financial strain on some tenants. So making sure applicants are financially capable of paying, paying more is of paying is more important than ever. Start by having potential tenants complete a rental application. Then conduct a comprehensive background check by using a tenant screening service. Now if you're using a manager and not self managing, of course the manager should be doing this for you. But again, you gotta manage your manager. So more to come on this of course many past episodes about this topic number six and finally, before we get to our guest, you're sticking with the game plan. Because property managers aren't struggling to fill their properties. 64% of them say they're not doing anything differently than a year ago to keep them filled. Now again, this is kind of dumb right here. You've got the supply and demand dynamics of the marketplace in your favor as the landlord and you should be taking advantage of this. And it's in my opinion it's only going to get better as Generation Y keeps flowing into the rental market over the next decade. I mean literally, I think this is the best dynamics we've ever had in history for rents, rental market for investors, I mean it's just phenomenal. However, over half of them, 54% have changed one thing. They're less willing to lower the rent and to offer concessions just to fill a vacancy. With renters lining up at the door, they just don't have to. Okay, tip. It's tempting to take it easy when rental properties seem to be filling themselves. Complacency, however, is a dangerous habit. Can consider that some of the world's biggest brands, Disney, Verizon, General Motors, otherwise known as Government Motors. Thank you Obama. Obama the fascist. Okay, so are also some of the biggest spenders on advertising and research. They're industry leaders and want to make sure they stay that way. While they do not need to invest heavily in marketing if the vacancy rate is low or not, they you okay. If the vacancy rate is low, you definitely can keep your rental property well maintained and work to foster good tenant relationships to Keep your profits high. Okay. So that you know that's something to think about too. Just still be a good landlord. But try and push these dynamics into your favor as you should. Okay. Upcoming Meet the Masters eventually go to Jason hartman.com again we got a larger room which was really amazing that we could pull that off. Thank you for the scrapbooking convention that was using that big ballroom that downsized their event. So we do have a few tickets left. Jason hartman.com in the event section. Sign up for that today and join us. We got Garrett Sutton, multiple best selling author of several of the Rich Dad Advisor books books talking about asset protection. We've got Gino, the founder and CEO of Cozy talking about how to just simply be a better self manager or manager of your manager of your properties, how to screen tenants better, all the good stuff. And a whole bunch of other great speakers. Our local market specialists from several markets are flying in, our property managers. This is I believe this is our 17th month meet the Masters event. We only do it once a year now. We used to do it twice a year. It's going to be a phenomenal time here in January in San Diego, California. So Jason hartman.com to register that. Also if you're interested in joining the Venture Alliance Mastermind Group for Dubai or Dubai event in February, that is going to be phenomenal, go to venturealliancemastermind.com we got some great speakers and participants lined up for that one as well. So let's get to our guest and let's talk about who gets what and why. It's my pleasure to welcome Alvin E. Roth to the show. He is a Craig and Susan McGaugh professor of Economics at Stanford University and the Gund professor of Economics and Business Administration Emeritus at Harvard, Harvard University. He's winner of the Nobel Memorial Prize in Economic Sciences and author of a fantastic book that I just had the pleasure of getting through about three weeks ago entitled who Gets what And the New Economics of Matchmaking and Market Design. Alvin, welcome. How are you?

I'm well, thank you. I'm glad to be here.

It's good to have you on the show and I just want to tell my listeners that you are doing something awesome as we're recording. You have one of those treadmill desks. I think that's just great that you do that. I've many times considered getting one of those.

I enjoy it. It saves my back.

Yeah, yeah. Keeps you in shape too. That's great. Well, you know, what is market design and the economics of Matchmaking?

Well, market Design is an ancient human activity, but it's a new thing for economists to think about. People have been making markets, designing marketplaces, since before the beginning of agriculture. When you look at the distribution of stone tools around the world, they're often found thousands of miles from where they were quarried and made. And that's evidence that our prehistoric ancestors knew something about the benefits of trade. And of course, today, when we see lots of new marketplaces on the Internet, from Google as a marketplace for ads to Airbnb as a marketplace for rooms and Uber as a market for taxi. Taxi rides, we see markets being created all the time. So one of the things that economists are now turning to is trying to understand what makes some markets work well and what makes some markets work badly, in a certain sense. Economists have studied markets for a long time, but entrepreneurs build marketplaces. And so the questions are, what are the connections? What do marketplaces have to do to accomplish, to make markets work well? And that's what market design is about.

You know, market design, it kind of implies central planning. Is that a necessary component of it, or is it something that just takes place in the free market or which way works better? What are your thoughts about that?

So I don't think. I think markets and central planning are very different. Central planners try to decide who should get what should be the outcomes. Market designers, makers of marketplaces, try to create a venue, a place where people can come together and figure out through, through markets, how to aggregate the necessary information to determine who gets what. The New York Stock Exchange is a central location, but it's not a place that central planning goes on. Lots of people come to that central location, and every day they determine the price from minute to minute of all the stocks traded on the exchange. But there isn't central planning going on. There's a market. So marketplaces can have central locations without being central planning. And free markets are markets that have rules that allow them to work freely. Again, think about the New York Stock Exchange. It has lots of rules. It opens at a certain time each day. Those are rules set by the proprietors. Some of the rules are laws. You can go to jail for trading on insider information. But together, the rules of a marketplace constitute its design. And what makes a market work well or doesn't has to do with how those rules work, how they interact with the interests of the participants in the market, and whether they allow them to get together in an efficient way to deal with the congestion that results. When a lot of people get together in a market and does it make it safe for them to reveal the parts of their information that they need to reveal to get what they want.

You talk a lot in the book about organ donation and kidneys and so forth, and I want to dive into that. But since so many of our listeners are interested in investing and real estate investing, especially you mentioned the New York Stock Exchange, of course, you know, do you have any just sort of general, broad thoughts on the real estate market?

Well, the real estate market is an unusual one. I've never been involved in commercial real estate, but of course I've bought and sold homes. And I continue to be surprised by the large role that Realtors play in the residential real estate market and how that has survived the growth of the Internet and the much easier access to information about homes that the Internet brings to us.

And by the way, that surprises me, too. So, yeah, go ahead.

So the many markets, many markets that we think of are commodity markets, but real estate markets aren't commodity markets. You can't just say, I want a house of a certain square footage at a certain price. Each house is different. So real estate is a matching market. You make offers on particular houses. And a lot of what I talk about in the book has some bearing on that because I make the distinction between commodity markets and matching markets, where you care who you're matched with you. If an offer is turned down, you have to formulate a different offer as opposed to when you're trying to buy shares in AT&T. You can put out an offer and no one accepts it for a while. You can still have that offer to the whole market because you don't care which shares of AT&T you buy. You just care how many and the price. But most markets are, or many markets are different than that, and real estate is certainly one of them. Of course, you can start when you're offering to sell a house. For example, you can offer to sell it to the whole market. When you're thinking about buying a house, you can survey as much of the market as you can manage. But once you make an offer now, you're engaged in a negotiation. And while you're engaged in that negotiation, other houses that you're interested in might go off the market. They might be sold. And if you're a seller while you're negotiating, other buyers might go off the market. So the timing matters. And this is something that I talk about as congestion. The reason offers on houses have strict time limits on them is because time isn't free. If your offer isn't going to be accepted you'd like to be able to be free to make another offer somewhere else. A lot of the rules of the real estate market have to do with ways of dealing with this congestion. You know, what does what contingent offers look like and how are they structured and all of those things.

Alvin, you know, when you talk about the surprise that, you know, the realtor market has survived the Internet as travel agents really haven't, and so many of these other intermediaries or so many of these other parties have been disintermediated by the Internet, but the real estate community has oddly survived. And, and I attribute that to the fact that the real estate business is so fragmented that it's not an exact commodity. You know, two houses, one right next to each other, across the street from each other, may be very different. And also, you know, maybe the concern that people have about buying such a high ticket item on their own, you know, it's not like an airline ticket or a ticket to a concert or some of these other things, you know, thought more thoughts about that.

Well, I think the surprising thing is not that you need intermediaries and help in buying expensive things like houses. What surprises me is that now that you can take a virtual tour on the Internet and things like that, that they aren't that the real estate contracts have stayed so similar to what they were before the Internet with a percentage of the sales price being what the realtor gets. You know, lawyers, high priced lawyers bill by the hour. So if what you needed was help in the closing, you could imagine that, that you just deal with lawyers. Or there are Realtors like Redfin who give you back some rebate, some of the commission. I'm surprised there hasn't been more competition.

But see why like Red. That's interesting about Redfin. You know, Redfin has been around for a long time now. They've got great technology, it's very well funded company, or at least it was. I haven't kept up with them lately, but they've hardly made a dent in the market. You know, you don't see Redfin much of anywhere, right?

So I think you have to give realtors a lot of credit for keeping this monopoly in contracting. And part of it has to do with the form of the contract. If you come to a house that is being shown by a realtor, then the contract says that the realtor will get the full fee, 5%, 6% of the sales price, regardless of whether you come with a realtor or not. So to the extent that realtors do make things easier, they do provide some services. You might as well have a realtor. Not having a realtor won't let you get the house cheaper. So I think that's part of what makes realtors still so ubiquitous. And again, what surprises me is not that Realtors still exist. They, they perform important services, but that they are paid so much compared to, say, the lawyers who, who help you close the deal.

I agree. You know, and that's, you know, that, that's just sort of. That, that concept of the 6%, it just sort of, it's been around through so many inflationary cycles, and now the prices of the real estate are so much more expensive and those fees are pretty high. But, you know, it's kind of interesting too, because I remember at one of my real estate conferences many years ago, one of the speakers that was hired to speak was Larry King. And oddly, he had some interesting insights into the real estate market. And he said, you know, would it, wouldn't everybody be okay with lower commissions if there were fewer real estate agents out there and there was less competition and you could do higher volume? See, to me, that would make a more efficient market. Real estate people spend massive amounts of their time and money on the marketing aspect, which really isn't, you know, that's not the business of serving customers a little. A little bit of it is, admittedly, but, you know, most of that is, it's kind of fluff. You know, it's not actually practicing the trade. You know, they're really. I've said, when I've spoken to real estate groups and trained them, I said, you know, you should probably consider yourself a marketing professional who happens to have a real estate license. It seems kind of backwards to me, but also seems true.

Well, I think the perspective of a Realtor, an individual agent, is different from the, from the perspective of someone who operates an agency. But I have to admit, this is a market that I don't understand very well. I would have predicted that Realtors would either their fees would drop as a percentage of the house sales or that their presence would decrease with the fact that they no longer have a monopoly on the multiple listing service, that you can sign onto that from your computer and find out a lot about houses and see pictures, and we've certainly seen Zillow and Truly and all these sites that increase information a lot. So I think it's something, I find it surprising. It's not something I've looked into deeply, but I find it surprising that Realtors still have the presence that they have in the residential real estate Market.

And I've got to agree with you, Alvin. I do, too. It's quite interesting the way that has all worked out. And really, a lot of those tools, by making that information accessible to the consumer, have really made their job easier because the consumer goes and does a lot of the work. You know, where at first the realtors were intimidated. Oh, my gosh, you know, the Internet's going to take over our business. But really, I think the way it's actually worked out is it's made their job a lot easier. It's kind of counterintuitive there, but talk to us about the world, the fascinating world of organ donation, if you would, and matchmaking and market design there. What if, God forbid, someone listening needs a kidney or something one day? What happens?

Well, let me take a step back before I do that to just continue the discussion about the difference between commodity markets and matching markets. Commodity markets, only the price matters. And when you're buying shares of AT&T on the New York Stock Exchange, you don't care who you're buying from or which shares you're buying. But as we've already discussed on in the real estate market, of course you care which house you're buying. That's a giant deal. So you can't just make an offer to the whole market. And in many of these markets that are matching markets, even when prices play the very important role that they play in real estate, they don't necessarily determine who gets what. An example I like to give is college admissions, where Stanford University doesn't choose its entering class by raising the tuition until just enough students want to come, until supply equals demand. You know, it's expensive to go to Stanford, but lots of students would like to come. And so there's these whole other market institutions of applications and interviews and admissions and essays and all of that. And similarly with labor markets, you can't just decide you want to work for Google, you have to be hired. So matching markets are markets where you can't just get what you want. You can't just choose what you want. You also have to be chosen. And you can't just choose what you want, even if you can afford it. So prices don't determine who gets what, although they can be important. But there are matching markets where we don't allow prices to play any role at all. And organ transplant is one of them. It's against the law in the United States to buy or sell a kidney for transplantation, for example. So partly as a consequence of that, we have a great shortage of organs. There are 100,000 people in the United States waiting on a waiting list for a deceased donor kidney. When you register for your driver's license, there's a good chance that in most states you ask, would you like to be on the deceased donor registry? And if you check that box, then that paves the way. If you die in a sort of special way that makes your organs possible to donate, it paves the way to do that. But there aren't enough of those organs. We do about 11,000 deceased donor transplants a year and there are a hundred thousand people waiting. So thousands of people die each year while waiting.

And that is a terrible thing. So should it be different? I mean, should we be allowed to pay? Should there be a market with which the actual money. I know many people find that distasteful in the US Although as you said, I believe in the book, it's not that way in every country.

It's that way in almost every country. The exception, the one country in the world that has a, an explicitly legal market for kidneys for money, where you can buy and sell kidneys is, strangely enough, the Islamic Republic of Iran. But everywhere else in the world it's illegal, although there are lots of black markets. So that's something worth talking about. And I devote a chapter to what I call repugnant transactions. But let me continue for a minute about kidneys, because the special thing about kidneys that makes all of this an issue is that healthy people have two kidneys and can remain healthy with one. So if there was someone you loved who was dying of kidney failure, you could perhaps donate a kidney to them.

I know, I have a friend who did just that. She donated one to her father.

Absolutely. But sometimes you're healthy enough to give someone a kidney, but you can't give a kidney to your father because there's a mismatch of some sort. Kidneys have to be matched. And so what has happened in the United States and my economist colleagues and I have had a role in helping organize it, is that there's a kind of non monetary matching market for kidneys now called kidney exchange. And supposing your friend wanted to give a kidney to her father and is healthy enough to give a kidney, but her father can't take her kidney for some reason, which happens often. And suppose you're in the same situation, there's someone you want to give a kidney to, but your patient can't take your kidney, then a kidney exchange would happen. If it was possible for you to give a kidney to her father and for her to give a kidney to your patient. And that way two people would get compatible kidneys that would work for them. Two transplants would be possible that wouldn't have otherwise been possible, and two lives would be saved. So kidney exchange has, in the last 10 years, become a standard form of transplantation in the United States, and it's spreading around the world. So that's a kind of matching market where we don't let money serve any role at all. But exchange is what's going on. So it's clearly the kind of thing economists are supposed to study. And so that's been a big success, but it's been a big success in a war that we're losing. That is, some thousands of transplants have been done because of kidney exchange, but there still aren't enough kidneys. The question you ask about should it be possible to compensate kidneys? Is a lively one. But as I said, it's not just against the law in the United States, it's against the law almost everywhere. As an economist, I feel that we don't understand that well enough. I've spent some time thinking about what I call repugnant transactions. So a transaction is repugnant if some people want to engage in it and other people think they shouldn't, even though it's not obvious that they come to harm themselves when the transaction takes place. And so kidney sales are a good example of that. There are clearly people who would like to buy kidneys. There are people who would like to sell them. And as a result, there are black markets that, like many markets that are illegal. It's hard to stamp out the market if people want to trade, but we have laws against it. When you look into this, you see that there are lots of repugnant transactions and they change over time, and they're different in different places. I think they're well worth studying. I'm in California right now, and in California you can buy the whole supply chain of a baby. You can buy sperm and you can buy eggs, and you can have a surrogate artificially inseminated and carry the baby to term, and you can pay the surrogate. In New York, you can do the same things, but it's not legal to pay the surrogate.

I love how you call that the whole supply chain of a baby. Interesting to hear it referred to that way.

It's a novel thing, and I mention it that way partly to indicate that not everyone thinks that's a good way to describe having a baby. In Britain, I was just in England I returned on Monday. It's not legal to pay surrogates. It's legal to go through that process I just described, but you can't pay the surrogate. So of course there's very little surrogacy in England. And we have fertility tourists coming to California from England. And there are many more fertility tourists going to places like India and Thailand where surrogacy is cheaper, but also less, well, less well organized. And so every now and then bad things happen. And so you think about a market that's going up like that, that in some places they make it illegal and in other places they make it legal, but with few rules to prevent bad things from happening. And when you talk about bad things happening, what you're talking about is a surrogacy agency, say, could go bankrupt while pregnancies are underway. So now the question is, what happens then? Maybe not all the pregnant women will be paid what, what their contracts call for. And so how will, how will that end? So, so you could say that could.

Be resolved through reserve requirements like insurance companies have, right?

Absolutely. So now you're talking.

Or maybe an insurance policy that would insure against bankruptcy, right?

Exactly. So now you're talking about how to regulate the market. What rules should we impose on, on companies that, that perform surrogacy brokerage so that bad things won't happen? And that's the beginning of market design. You know, you say, are we going to allow a market? If we're going to allow it, what rules should it operate under? What should its rules be so that it doesn't have bad outcomes that we would regret? That's what market design is about, allowing markets to work well, providing rules that allow them to work well if we think they should be allowed to work. There are lots of illegal markets like narcotic drugs and non narcotic drugs. So in the United States, the states are now starting to experiment with legalizing marijuana. So Colorado and Oregon, and there are places where you don't have to say, I get headaches. Can I qualify for medical marijuana as one does in California? And we'll see how that goes. A giant experiment, if you like, in repugnant transactions has been going on around the world and in the United States in the last 10 or 20 years involving same sex marriage, that's a transaction that some people would like to engage in. They would like to marry each other and other people don't think they should be allowed to. And in the United States, we went from no state allowing same sex marriage before 2004. When Massachusetts legalized it to all states now having to allow same sex marriage because the Supreme Court just made a decision on that. So these are things that can change fast when they change and are different in different parts of the world and continue to divide Americans. So, you know, when you ask me, should kidneys, should it be allowed to compensate kidney donors? That's a question that's subject to a lot of discussion. I don't know how it will go. When you see something that's against the law everywhere in the world, there's a good reason to think it may stay against the law for a while.

Well, you know, it's interesting, Alvin, that you bring up the same same sex marriage thing, because, you know, my thought about that was, regardless of my own personal feelings on the issue, I don't see why the government should be allowed to get involved in whether or not someone's allowed to make a contract. I mean, I, you know, I probably, you know, do 2, 300 contracts a year in all my different businesses and so forth. Maybe even more. I really don't know, but it seems like I'm signing one a day almost. So, you know, why would the government be allowed to interfere in that? But I guess you're right. You know, the government interferes in all sorts of contracts. It won't let you do a kidney contract. It won't let you engage in a contract for the world's oldest profession. Of course, I'm talking about prostitution. So the government interferes constantly in contracts, right?

Well, the government also supports contracts. If you and I sign a real estate contract and later I don't fulfill the terms of it, you can sue me in court. The courts are part of the government. So. So, you know, you say governments interfere with contracts, but they also give property rights. If I want to sell you my house, the question of, is it my house? Is normally something we resolve by looking at the title, which is registered in the county courthouse. So a lot of what governments do is support contracts and markets, and they support them by regulating them. That is, judges will decide whether when you and I have a contract dispute, there's, you know, an agency of the government that decides which of us is correct and what the remedy should be. And that's what, that's what makes contracts safe to sign. And in general markets, one of the things marketplaces have to do is make transactions safe. So government plays lots of role and often we think of it as interfering, but it's hard to think of which contracts you could, you know, of the hundreds of contracts you engage in each year, which would be safe to do if they weren't backed up by, by the legal system.

That, oh, you'd have a bunch of vigilantes would be terrible. It'd be anarchy. You know, it'd be, it would not be good that the, you know, a primary role of government is to have a court system and to enforce contracts. But the problem, I'm saying is that some contracts aren't enforceable because they're not legal to enter into.

No, that's, that's right. That's where we talk often about repugnant transactions. Yes.

Right, yeah, fascinating. Well, you know, just kind of to start wrapping this up here, you know, what, what is the sort of takeaway that the listeners should have? Alvin? What is the, you know, is there anything kind of actionable here or is this, you know, just something to be aware of and know about or, you know, how can people apply this to their lives?

Okay, well, let me answer that two part. First of all, some of it is something to know about. I mean, it's one, one way to read my book is that it's sort of a field guide to markets. And you, you start noticing how markets work and that gives you an awareness of them that, that is often actionable, but doesn't have to be. And of course, we're entering a political season where there's going to be a lot of discussion about what are free markets. And you and I have already touched on that. An analogy I like is a wheel that can rotate freely. You know, if you have a wheel that can rotate freely, it's not in a vacuum, it's on an axle, it has well oiled bearings and that's why it can rotate freely. And what we've just been discussing when we talk about contracts and property rights and rules and regulations is that to work freely, markets need rules that allow them to let competition happen and to make transactions safe. So when our politicians talk about free markets, they often do it without saying what they mean. And they often seem to think it has to do with the number of rules and regulations. I think it's better to talk about what rules and regulations do markets need to work well and different markets need different rules. Now, in terms of actionable things, one of the things I talk about is that many markets are congested. A marketplace, once it succeeds in making a market thick, there are lots of transactions to think about and they're hard to evaluate in the time that you might have. All sorts of strategies crop up in different markets. And I talk about at some length about signaling. One of the things I say, for instance, is if you know a student who's applying to colleges and they visit a college campus, they should be sure to sign the guestbook at the admissions office. Because many, many colleges have so many applications that they can't easily give all of them careful consideration. And they have to think not just about who they like, who they think would be a successful student, but who likes them enough that they would succeed in recruiting them if they make them an offer of admission. And so they look for signals. And because it's so easy nowadays to submit many college applications, getting an application is not a strong signal of interest anymore. But coming to visit the campus, you can't easily visit two dozen campuses, even if you can make two dozen applications. So colleges look for signals of interest like that. Just as on dating markets, signals of interest are important. One of the things I talk about in the book is how in many Internet dating sites, women with attractive photographs get many more email contacts than they can really process.

That was fascinating. Since I'm single, my ears perked up and I, you know, it's just. I was talking to a friend about match.com and the other dating sites last night. It really doesn't work very well, at least for men, because it's so imbalanced. And every guy in the world is emailing the. The attractive women, and, and, you know, they can't sift through all the, all the emails. It's ridiculous.

So a market design innovation that some friends of mine did on an experimental basis with a dating site is they gave everyone two virtual roses that they could send each day in their email. So you could send as many emails as you wanted, but only two of them could have roses attached. And what that meant is if you got an email from someone with a rose attached, it might be worth looking at because they weren't sending off a thousand of those. And what they found, Muriel Neely and Su Le, when they did this experiment, was that emails with roses attached led to a lot more contact, subsequent contacts than emails without. And so that's a little like visiting the college campus of a place that you're applying to or writing a persuasive cover letter when you're applying for a job. That shows that you're not applying to all the jobs that you found on Monster.com, but rather that you know what this company does and have an idea of what job you could do for them. So sending signals is important, not just in markets. That's what Peacocks have big tails in order to show that they're healthy and can escape from foxes even though they have healthy tails. And there are two kinds of messages that you send in a congested market. One kind of message is, I'm interesting. You should be interested in me. I'm talented, I have a desirable property, whatever. So when you're applying to college, for example, that's the kind of message you send with your high school grades and your extracurricular activities. Look at me and what I've accomplished at the ripe old age of 18. But there's another kind of signal you send, which is not only should you be interested in me, but I'm interested in you. So if you respond, if you try to make a match with me, you might have a chance of succeeding. I might be worth talking to. And that's the different kind of message you send by visiting the college campus, by sending a rose, by sending a carefully worded email that shows that you've read the profile of the, of the woman you're sending your, your email to. And in congested markets, you have to send both kinds of signals. I'm interested in you and you should be interested in me.

You know, very interesting. Good stuff. Well, Alvin, give out your website, tell people where they can find out more. You got some great blog articles. You've got, you know, one that's talking about assisted suicide and you know, the different organ donation laws, how they vary state by state. Fascinating stuff.

Well, if people search on Google for market design, they'll find my blog or if they search on my name, Alvin Roth. And of course the book is called who Gets what and why the New Economics of Matchmaking and Market Design.

I would highly recommend that book to anybody who's interested in this concept. And you know, it just applies to every area of our life, pretty much every day of our lives. So understanding the way markets work, very, very important. Alvin E. Roth, thank you so much for joining us.

Thank you.

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