Ronald Coase discovered firms exist as pricing mechanism couldn’t coordinate (as advocated by free market advocates) as there were transaction costs and the firms were best positioned to take care of those transaction costs. Then we had theories from Doug North where he said markets worked bnest if we had proper institutions. Then we had work from Akerlof, Spence and Stigilitz which took off after Akerlof’s seminal piece called Market for lemons. It brought the importance of information asymmetry being persistent in markets leading to ineffective markets. Next was the work from Behavior Economics/Finance field pioneered by Kahnemann and Tversky which questioned the basic assumptions of economics- rationality.
Basically, all four said in their own way that markets don’t work as efficiently and effectively as we assume it to be. I thought these four main theories summarised more or less about inefficiency of markets. However, I soon realised more is to come.
On reading Greg Mankiw’s post on repugnance in markets where he simply points to a forum discussing the same, I never gave it much thought. However, on reading the background paper by Alvin Roth, I was really taken back that there is something called repugnance which could be brought into the equation as well while discussing markets.
What is repugnance? Wikipedia says
The term wisdom of repugnance describes the belief that an intuitive (or “deep-seated”) negative response to some thing, idea or practice should be interpreted as evidence for the intrinsically harmful or evil character of that thing.
How does it impact working of markets? Well, those products/services which a society deems as repugnant (but are useful like an exchange for trading kidneys) will not trade in the usual way as the other products. First, there will be a reluctance to come forward and offer such products and second even if they do come, the outcomes are not going to be efficient as these markets will have only very few takers.
Roth offers many examples of repugnant markets like insurance products for children& old, gambling and betting markets, adoption, etc. Then he shows how it leads to problems in market design and how he tried to solve them in some cases.
Excellent stuff. Highly recommended! A different and fresh perspective.
I now realise, it could be made part of behavior economics. Using BE theories, attempts could be made to reduce repugnance as elimination might not be possible.
