Coase-Sandor Working Paper Series in Law and Economics

Publication Date

2024

Abstract

In a neglected but prescient article, George Priest argued that the “unraveling” of markets for medical residents and judicial clerks resulted from the monopsony power of employers (a cartel in the first case, the government in the second). Because wages were largely fixed, early offers and acceptances of employment became an efficient form of nonprice competition—and efforts to solve the problem of unraveling through market design merely reinforced monopsony power. In a reply, Alvin Roth—the leading figure in the market design literature, who was instrumental in perfecting the design of the medical residency matching program—argued that Priest was wrong to believe that unraveling could be a result only of monopsony or that it was necessarily efficient. Roth pointed out that market efficiency often requires enforcement of certain rules for matching buyers and sellers; if people can violate those rules, the market will collapse. Roth was right that Priest’s diagnosis was too simple. But Priest made a plausible case that the matching program sustained a then-illegal and still harmful employer cartel. Priest’s article also raises questions about other entry-level application processes that are designed by economists on behalf of employers.

Number

1015

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