Wednesday, January 18, 2006

Micro-economic engineering!

A tad fancy term but one that well captures the future of its potential. Designing markets may be high academia but one that I believe that will become increasingly important. Why? There is more and more attention and evidence that policies matter a lot in the production and distribution of wealth. The unseen once again at work! But what kind of policies? More importantly, who should implement those policies? What are their limitations? What do we know about their conditions for success? To which sectors can they be applied?

The practical lessons from microeconomic engineering of markets will seep into policy design for businesses and institutions, albeit slowly. John McMillan of the Graduate School of Business, Stanford University offers deeper insight for the interested layman in his paper, Market Design: The Policy Uses of Theory. The next paragraph is a snapshot of his theme.

Micro-economic engineering is already at work in allocation and auction practices (spectrum and electricity deregulation); assigning ownership (divestiture of assets in the implementation of competition policies); and policies for markets in transition. He also points to the limitations of market design. The theory is important, but context also matters like politics or rule-enforcement. (I would add that politics matters more than the economics.) And to recognize the constraints of information in decision-making.

To add a few thoughts to it, the informal rules present are very important before any policy design. It matters in businesses for attracting consumers and as well for developing policies for citizens. An interesting example that I came across recently. Kellog's cornflakes are used with cold milk in US, but people in India do not like drinking cold milk early in the morning. Hence the corn flakes had to be adapted to the hot milk taste of Indians. Similarly, the prerequisite for an understanding of the local institutions while designing policies.

Keep watching this space for more lessons on designing markets!

Back to the Top

Back to the Top