The Walras-Bowley Lecture: Fragmentation of Matching Markets and How Economics Can Help Integrate Them

TL;DR

This paper examines how fragmentation affects matching markets like school choice and medical residencies, using Japanese daycare data to evaluate partial versus full market integration and their impacts on welfare and efficiency.

Contribution

It provides empirical evidence on the effects of market fragmentation and proposes a balanced partial integration approach to improve outcomes.

Findings

Partial integration recovers 39.2% to 59.6% of welfare gains of full integration.

Partial integration reduces travel time by 3.3% to 4.9%.

Unmatch rate decreases by 40% to 52.8% under partial integration.

Abstract

Fragmentation of matching markets is a ubiquitous problem across countries and across applications. In order to study the implications of fragmentation and possibilities for integration, we first document and discuss a variety of fragmentation cases in practice such as school choice, medical residency matching, and so forth. Using the real-life dataset of daycare matching markets in Japan, we then empirically evaluate the impact of interregional transfer of students by estimating student utility functions under a variety of specifications and then using them for counterfactual simulation. Our simulation compares a fully integrated market and a partially integrated one with a "balancedness" constraint -- for each region, the inflow of students from the other regions must be equal to the outflow to the other areas. We find that partial integration achieves 39.2 to 59.6% of the increase in the child welfare that can be attained under full integration, which is equivalent to a 3.3 to 4.9% reduction of travel time. The percentage decrease in the unmatch rate is 40.0 to 52.8% under partial integration compared to the case of full integration. The results suggest that even in environments where full integration is not a realistic option, partial integration, i.e., integration that respects the balancedness constraint, has a potential to recover a nontrivial portion of the loss from fragmentation.