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Bringing Real Market Participants' Real Preferences into the Lab: An Experiment that Changed the Course Allocation Mechanism at Wharton

Eric Budish, Judd B. Kessler

NBER Working Paper No. 22448
Issued in July 2016, Revised in December 2018
NBER Program(s):Industrial Organization Program

This paper reports on an experimental test of a new market design that is attractive in theory but makes the common and potentially unrealistic assumption that "agents report their type"; that is, that market participants can perfectly report their preferences to the mechanism. This concern about preference reporting led to a novel experimental design that brought real market participants' real preferences into the lab, as opposed to endowing experimental subjects with artificial preferences as is typical in market design laboratory experiments. The experiment found that market participants were able to report their preferences "accurately enough" to realize efficiency and fairness benefits of the mechanism, though preference reporting mistakes did meaningfully harm mechanism performance. The experimental results persuaded the Wharton School to adopt the new mechanism and helped guide its practical implementation. It is hoped that the experimental design methodology may be of use to other market design researchers, either for evaluating or improving preference reporting for existing mechanisms or for bringing other new mechanisms that utilize rich preference information from theory to practice.

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Document Object Identifier (DOI): 10.3386/w22448

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