The Market Design Working Group, established in 2009 under the leadership of Susan Athey and Parag Pathak, is a preeminent research forum in the field of market design. The working group meets annually, alternating between Cambridge, Massachusetts, and Palo Alto, California, to present research that bridges theoretical economics and practical applications, all focused on what The Economist aptly characterized as “an intelligently designed invisible hand.”¹ Research in market design has been celebrated in academic circles, as evidenced by recognitions like the 2012 Nobel Prize for work on matching markets and the 2020 Nobel Prize for auction theory, and has also been instrumental in catalyzing tangible reforms in real-world institutions and markets.

One feature that sets market design apart from much of traditional economic theory is its unwavering commitment to practical applications. Market designers have developed a unique professional profile, equally at home in university lecture halls, hospital surgery wards, school committee meetings, and the boardrooms of technology companies. This versatility allows them to translate complex economic models and analyses into solutions for real-world problems. The field’s research has informed an impressive range of applications across various sectors of society.

Markets for Kidney Exchange

Kidney exchange is one of market design’s most celebrated success stories. In the United States, over 90,000 patients await kidney transplants. Economic research has helped create sophisticated matching systems that identify chains of compatible donor-recipient pairs. A long list of studies by NBER affiliates have contributed to increasing paired-exchange transplants more than a hundredfold to over 1,000 annually.² Tayfun Sönmez and M. Utku Ünver have expanded this approach to liver transplants with a groundbreaking center in Turkey that recently completed the world’s first seven-way liver exchange.³ This expansion demonstrates how market design principles can be adapted and applied to different medical contexts, each with unique constraints and requirements.

Spectrum Auctions

Another landmark achievement of the field is the development of auctions for electromagnetic spectrum, first in the United States and then worldwide. As the use of wireless technologies exploded in the 1990s, along with the corresponding demand for electromagnetic spectrum, policymakers turned from administrative and lottery-based allocation rules to auction-based systems. Leo Herzel and Ronald Coase had called for market-based spectrum allocation in the 1950s.⁴ In practice, implementing this idea required inventing novel, complex auction mechanisms due to the large number of objects being auctioned (many different frequencies over many different regions) and complex bidder preferences (e.g., a bidder may be interested in bidding on frequencies in Los Angeles only if they are also highly likely to win frequencies in San Francisco, and vice versa). John McMillan and Paul Milgrom describe the initial designs of these mechanisms.⁵ The development of market mechanisms for the allocation of electromagnetic spectrum continues to be an active research area, with many of the developments spurred by the changing economics of available spectrum and the physical properties of various new technologies and spectrum bands. For example, the 2017 two-sided “incentive auction” involved not just selling frequency bands to telecommunications companies but also simultaneously purchasing frequency rights for spectrum from TV stations. Lawrence Ausubel, Christina Aperjis, and Oleg Baranov and Milgrom and Ilya Segal explain how its design relied on both theoretical and computational innovations in auction design; Kevin Leyton-Brown, Milgrom, Neil Newman, and Segal describe broader lessons from the spectrum auctions.⁶

Design of Digital Platforms

As technology continues to reshape markets at an unprecedented pace, market design research has focused on new questions about platform regulation and digital marketplace dynamics. A prime example is the ongoing debate about search engine competition. When Google faced regulatory scrutiny over its dominant position in online search, market designers provided crucial insights into auction design for choice screens — the interfaces that allow users to select their default search engine.

Ostrovsky’s analysis revealed that seemingly minor technical details in auction design could have major implications for competition.⁷ For instance, the choice between having search engines bid per appearance versus per installation could significantly affect market outcomes and competitive dynamics. The field has also contributed to understanding and improving other digital marketplaces, from ride-sharing platforms to online advertising markets. Researchers have developed frameworks for analyzing two-sided markets, network effects, and platform competition, helping shape business practices and regulatory approaches.

Education

Market design has also made important contributions in the field of education, with many scholars contributing to this area.⁸ When the city of Boston faced the challenge of balancing neighborhood school assignment with citywide choice, Umut Dur, Scott Kominers, Pathak, and Sönmez, and Pathak and Peng Shi conducted detailed analyses of various policy options. Their research led to a surprising finding: a policy that supposedly gave preference to local students for half of each school’s seats performed almost identically to having no neighborhood preference at all.⁹ This insight helped policymakers better understand the true implications of different assignment mechanisms and make more informed decisions about school choice policies. Similar work has been conducted in other major school districts, leading to nationwide reform in student assignment systems. These projects highlight ways in which market design research can advance multiple objectives, including increased student satisfaction and better academic outcomes.

Military Labor Markets

The US military has also relied on market design analysis to assign soldiers to positions. The Army’s recent overhaul of its cadet assignment system exemplifies how sophisticated economic theory can be translated into practical solutions. The new system, based on the “matching with contracts” framework, allows for nuanced expression of preferences. Under this system, cadets can rank complex combinations of assignments and service terms. For example, they can express preferences such as ranking infantry service for three years above cyber operations for three years but below infantry service for five years. This flexibility has led to improvements in both cadet satisfaction and organizational effectiveness.¹⁰ Market design research has also resulted in changes to how cadets obtain their first placements at both the United States Military Academy and through the ROTC program.

Financial Markets

Regulation and concerns about the performance of financial markets have also spurred research on market design approaches to financial markets. Eric Budish, Peter Cramton, and John Shim argue that the quest for ever-faster trading entails high costs but creates little value.¹¹ Their analysis of high-frequency trading reveals a flaw in modern financial markets: when new information arrives, continuous trading creates a race to react first, spurring massive investments in speed technology. These races happen frequently but last mere milliseconds. The researchers point out that replacing continuous trading with frequent batch auctions — essentially creating very short but discrete trading intervals — could eliminate the advantage of being microseconds faster than rivals, redirecting competition from speed to price. For ordinary investors, who trade in much longer time frames, the market would still feel continuous. This trading structure has yet to be adopted by any major exchange, prompting Budish, Robin Lee, and Shim to investigate the incentives organizations face when adopting new market designs.¹²

Energy and Electricity

Another area that has been the subject of much research in market design is the operation of electricity markets. Electricity supply is characterized by nonconvexities and indivisibilities, making market clearing difficult. Some technologies, especially older, carbon-intensive ones, face relatively low fixed costs and moderate marginal costs. Burning a bit more coal, for example, produces a bit more electricity. At the same time, newer, often cleaner technologies may face high fixed costs and completely inflexible supply, sometimes as extreme as having essentially zero marginal cost up to some point and infinite marginal cost beyond it. For example, once installed, a solar panel will produce an amount of electricity that depends only on the amount of available sunlight and not on the current electricity price or demand conditions. To avoid blackouts, it is critical for electricity markets to always be in equilibrium while adjusting to uncertain changes in demand conditions. Mete Şeref Ahunbay, Martin Bichler, and Johannes Knörr, and Cramton summarize research on designing markets that can resolve these difficult issues efficiently.¹³

The shift to alternative technologies for electricity production raises additional market design challenges beyond the design of electricity markets themselves, such as the “interconnection queue,” studied by Sarah Johnston, Yifei Liu, and Chenyu Yang.¹⁴ Before a new power generator can start supplying electricity to consumers, it must be connected to the electrical grid. This requires costly and time-consuming investment by the electricity grid to improve its transmission infrastructure to handle the additional load. Many grid regulators employ simple first-come, first-served waiting lists for processing the applications, and, given the backlog, the process often takes years. Renewable energy developers frequently cite this “interconnection” process as one of their biggest hurdles, and most end up not completing the process after submitting initial applications. Alternatives to the interconnection queue and mechanisms for deciding which generators to connect first can lead to substantially improved outcomes and a faster transition to cleaner forms of energy.

Public Housing and Refugee Resettlement

Recent market design research has explored policies for the allocation of government-owned housing. Government agencies worldwide use a variety of procedures for this critically important allocation problem. Nick Arnosti and Shi, and Daniel Waldinger examine the properties of various mechanisms and illuminate the trade-offs between the objectives policymakers face when designing allocation rules and mechanisms.¹⁵

A related body of research analyzes policies for refugee resettlement. Worldwide conflicts lead to large numbers of displaced individuals and families, and after countries agree to accept them as refugees, decisions need to be made about which regions, cities, and specific locations will be suitable hosts. This is a complex two-sided market: localities may have specific needs and availabilities, while refugees may also have diverse preferences. Three recent studies — by David Delacrétaz, Kominers, and Alexander Teytelboym; Tommy Andersson and Lars Ehlers; and Kirk Bansak, Soonbong Lee, Vahideh Manshadi, Rad Niazadeh, and Elisabeth Paulson — characterize effective mechanisms for resolving these competing preferences.¹⁶

The Human Factor

Success in market design increasingly depends on understanding human behavior as much as formal economic models, incorporating “behavioral” aspects — how participants actually make decisions — as well as the implications of rational behavior. This focus on human behavior has led to important insights about information provision in school choice systems and physician decision-making in hospitals. Empirical research by Fanyin Zheng on the allocation of hospital resources and by several research teams on parental behavior in ranking schools suggests that the way choices are presented and information is structured can significantly affect outcomes.¹⁷ These findings can lead to more nuanced approaches to market design.

New Directions

The Market Design Working Group convened a landmark conference in 2023, supported by Schmidt Futures, where leading contributors to the field assessed past research and addressed emerging opportunities in environmental markets — including those related to water resources and climate change — healthcare resource allocation, and artificial intelligence (AI).¹⁸ Market design’s expansion brings new challenges. As the discipline tackles increasingly complex problems, it must balance theoretical elegance with practical implementation. Healthcare resource allocation is a case in point. Market design research on vaccine allocation during the COVID-19 pandemic and on government incentives for vaccine development, for instance, requires navigating not only economic efficiency but also ethical considerations and entrenched institutional practices.¹⁹

Looking Ahead

Early research in market design drew on complementarities between noncooperative and cooperative game theory to deliver insights into practical design problems.²⁰ Sönmez and Ünver have advocated for “minimally invasive market design,” which focuses on the consequences of targeted improvements rather than wholesale institutional changes.²¹

Increasingly, market design researchers draw on a comprehensive array of tools that extend beyond theoretical modeling. Researchers now routinely analyze empirical data from existing markets to understand how systems actually perform and identify real-world patterns and problems. They employ sophisticated counterfactual simulations to test potential market changes before implementation, allowing them to predict the likely outcomes of different reforms. Natural experiments arising from policy changes provide valuable evidence about how market adjustments work in practice, while carefully designed field experiments allow researchers to test new mechanisms with actual market participants. These real-world trials are complemented by laboratory experiments where market rules can be tested under controlled conditions to understand better how people make decisions.

This multi-method approach enables researchers to validate theoretical predictions with concrete evidence, uncover practical challenges that pure theory might miss, test potential solutions before full implementation, and refine market mechanisms based on observed behavior. By combining multiple research approaches, market designers can offer more reliable and effective solutions to complex design situations.

Another new methodological development involves partnerships between market designers and computer scientists, enriching the field through interdisciplinary exchange. Computer science scholars bring a distinctive analytical perspective centered on computability and approximation algorithms, complementing economists’ traditional focus on incentives and efficiency. The engineering-oriented mindset in computer science also helps translate theoretical insights into practical, scalable solutions. The emergence of AI has created new opportunities for collaboration, as market design challenges increasingly involve complex computational problems and large-scale data analysis. AI applications raise novel questions about mechanism design, platform governance, and resource allocation, benefiting from both economic and computational perspectives. These cross-disciplinary interactions are likely to deepen as markets become more digitized and algorithmically driven, with computer scientists and economists working together to design and implement better market mechanisms.

Market design’s combination of theoretical rigor and practical impact continues to attract new scholars and practitioners. Current projects span an impressive range — from Kominers and Jesse Shapiro’s research on content moderation on social media platforms,²² to Jason Baron, Richard Lombardo, Joseph Ryan, Jeongsoo Suh, and Quitze Valenzuela-Stookey’s research on foster care placement,²³ to Ostrovsky, Michael Schwarz, and Frank Yang’s studies of congestion pricing²⁴— evidence that the “economic engineering” approach central to the group has found application far beyond its original domains. The field demonstrates how rigorous research, when combined with practical application and careful attention to institutional context, can deliver important insights into some of society’s most intractable problems.