The Power of Two in Token Systems

TL;DR

This paper investigates the effectiveness of token systems in thin markets, demonstrating that stability and cooperation are achievable with just two available service providers, supported by simulations in kidney exchange contexts.

Contribution

It shows that token distributions become stable with two or more providers, highlighting the importance of the 'power of two' in maintaining cooperation in token economies.

Findings

Token distribution is unstable with only one provider.

Stability is achieved when two providers are available.

Simulations suggest potential for efficient kidney exchange outcomes.

Abstract

In economies without monetary transfers, token systems serve as an alternative to sustain cooperation, alleviate free riding, and increase efficiency. This paper studies whether a token-based economy can be effective in marketplaces with thin exogenous supply. We consider a marketplace in which at each time period one agent requests a service, one agent provides the service, and one token (artificial currency) is used to pay for service provision. The number of tokens each agent has represents the difference between the amount of service provisions and service requests by the agent. We are interested in the behavior of this economy when very few agents are available to provide the requested service. Since balancing the number of tokens across agents is key to sustain cooperation, the agent with the minimum amount of tokens is selected to provide service among the available agents. When exactly one random agent is available to provide service, we show that the token distribution is unstable. However, already when just two random agents are available to provide service, the token distribution is stable, in the sense that agents' token balance is unlikely to deviate much from their initial endowment, and agents return to their initial endowment in finite expected time. Our results mirror the power of two choices paradigm in load balancing problems. Supported by numerical simulations using kidney exchange data, our findings suggest that token systems may generate efficient outcomes in kidney exchange marketplaces by sustaining cooperation between hospitals.