17 Mar 2011Working Paper Summaries

Marketplace Institutions Related to the Timing of Transactions

by Alvin E. Roth

Certain markets face the problem of "unraveling," in which competition for good talent leads a firm to make job offers earlier and earlier, without sufficient knowledge about any given applicant—and in which applicants are forced to decide whether to accept a job before they really know much about working for that firm. Harvard Business School professor Alvin E. Roth discusses how this issue affects the labor markets for new lawyers and gastroenterology fellows, as well as the market for postseason college football bowls. Key concepts include:

The market for postseason college bowls is one in which the negative effects of unraveling can be easily quantified: If two teams are matched to play a postseason game before they have finished the regular season, it's possible that one or both will lose some of their remaining regular season games, making the postseason bowl game less attractive to potential TV viewers than it would have been if it had featured more successful teams.
Efforts to stop the problem of unraveling in the market for law graduates have generally been unsuccessful, as have attempts to establish uniform dates for recruiting and hiring. This proves that unraveling is a problem even in markets such as law, where salaries are easily adjustable.
On the other hand, the market for new medical residents has faced little unraveling ever since that market introduced a stable resident matching system. This negates the idea that rigid pricing is the cause of unraveling, because the medical field generally pays its new residents uniformly across the board.

Author Abstract

This paper describes the unraveling of transaction dates in several markets, including the labor markets for new lawyers hired by large law firms and for gastroenterology fellows, and the market for post-season college football bowls. Together these will illustrate that unraveling can occur in markets with competitive prices, that it can result in substantial inefficiencies, and that marketplace institutions play a role in restoring efficiency. I'll conclude with open questions about the role of marketplace institutions and the timing of transactions.