the collapse of a medical labor clearinghouse (and ... -...

The Collapse of a Medical Labor Clearinghouse(and Why Such Failures Are Rare)

By C. NICHOLAS MCKINNEY, MURIEL NIEDERLE, AND ALVIN E. ROTH*

Many entry-level labor markets (and quite afew other markets) have at some point in theirhistory suffered from the “unraveling” of hiringdecisions. Unraveling is typically a dynamicprocess, in which offers are made earlier fromyear to year, and can come to be written quitefar before actual employment starts. In marketsthat experience unraveling, applicants typicallyreceive “exploding” offers that must be ac-cepted or rejected before other offers can bereceived and considered. The causes of thismarket failure are, however, still not wellunderstood.1

In many markets there have been vigorousand sustained efforts to halt the unraveling ofappointment dates. Efforts simply to imposeuniform appointment dates, without any marketstructure to support them, have most often beenunsuccessful. Some markets have successfullyreorganized themselves around a centralizedclearinghouse, which permits matching at a uni-

form, efficient time (Roth and Xiaolin Xing,1994).2

Not all centralized clearinghouses have beensuccessful. There is a good deal of empiricalevidence (see, e.g., Roth, 1984, 1991; Roth andXing, 1994) that a key element of the design ofa successful clearinghouse is whether it pro-duces matches that are stable in the sense thatthere exists no firm and worker who are notmatched to one another, but who would bothprefer to be matched to one another rather thanaccepting the results of the centralized clearing-house (cf., David Gale and Lloyd Shapley,1962; Roth and Marilda Sotomayor, 1990).3

Some unstable matching mechanisms, however,have been observed to persist for years (see,e.g., Roth, 1991), and a very few stable match-ing mechanisms have been observed to fail.4

We know of about 100 markets and submar-kets organized by a stable matching mechanism(often called simply a “match”), but we know ofonly a handful in which a stable match wasabandoned after operating successfully for sev-eral years. The gastroenterology market is theonly one of these for which we have been ableto gather evidence that suggests that the demiseof the match is primarily related to eventswithin the market itself. It therefore provides uswith a unique opportunity to investigate why astable centralized mechanism failed, while somany others continue to be successfully used.

This is an issue of considerable interest tomarket designers who are asked to consider howand when stable clearinghouses may improve

* McKinney: Department of Economics and BusinessAdministration, Rhodes College, Memphis, TN 38112(e-mail: [email protected]); Niederle: Departmentof Economics, Stanford University, Stanford, CA 94305and National Bureau of Economic Research (e-mail:[email protected]); Roth: Department of Economics,Harvard University, and Harvard Business School, 308Littauer, Cambridge, MA 02138 (e-mail: [email protected]). This work was partially supported by a grantfrom the National Science Foundation. We also thank DavidBrenner, M.D., Fred Gorelick, M.D., and Sean Sheehan,M.D., for agreeing to be interviewed about the demise of thegastroenterology match. Robert Beran, Elliott Peranson, andCody Webb, M.D., helped orient us to the ongoing events ingastroenterology. We thank David Cutler, Ernan Haruvy,Gerhard Orosel, and an anonymous referee for helpfulcomments.

1 Roth and Xiaolin Xing, 1994, describe several dozensuch markets and submarkets. Two markets that have re-cently been experiencing this kind of unraveling are themarket for law clerks for federal appellate judges (seeChristopher Avery et al., 2001), in which offers have beenmade almost two years in advance of employment, and themarket for college admissions (Avery et al., 2003), in whichelite colleges admit a high percentage of their enteringclasses “early decision.”

2 For possible effects of a match on wages, see Niederleand Roth (2003a).

3 This is a bit of an oversimplification. Many labormarkets have special features that complicate the definitionof stability (see, e.g., Roth and Elliott Peranson, 1999).

4 In theory, stability is neither a necessary nor sufficientcondition for the success of a match (see Roth and Xing,1994; Hao Li and Sherwin Rosen, 1998; Li and Wing Suen,2000; Suen, 2000).

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market performance.5 While it seems clear thatcentralized matches that produce unstable out-comes have been unsuccessful in organizingmarkets, we do not know when stable matchesare successful. Understanding this will help usunderstand what other markets, which currentlydo not have a centralized match, may be able tosuccessfully introduce a match; and which ofthe markets that now have a successful matchmay be prone to fail (and what could be done tohelp them). Finally, understanding the failure ofa centralized match, and hence better under-standing environments in which a centralizedmatch succeeds, may also help us understandhow decentralized markets of this kind clear, orfail to.

To address the reasons for the market failurein the gastroenterology market, after consider-ing the history of the market prior to the col-lapse of the match, we will turn to laboratoryexperiments. The available field data, whilesuggesting hypotheses about the cause of thecollapse (some of them put forward by marketparticipants), do not allow these hypotheses tobe distinguished, because they are all consistentwith the history of the market. Experiments in thelaboratory allow us to reproduce and vary, on asmall scale, different conditions of supply anddemand—and the kind of shocks experienced bythe gastroenterology labor market just prior to thecollapse of the match—in ways that the singleobservation of the history of the market cannot.

I. The Gastroenterology Market

The history of the market for GI fellowships(so called because of the older name of Gastro-Intestinal disease) is similar to that of many

medical labor markets (Roth, 1984; Roth andXing, 1994). Before 1985, it suffered from theunraveling of appointment dates, and a numberof solutions were attempted prior to the adop-tion of a centralized match (Lauren B. Gerson,1999). In 1986, the Medical Specialties Match-ing Program (MSMP) was initiated to establisha uniform appointment date and to permit ap-plicants to complete at least two years of resi-dency before deciding which subspecialty topursue. The fellowship clearinghouse was con-ducted a year in advance, i.e., after two years ofinternal medicine residency and one year beforeemployment would begin (NRMP, 1999). Ap-plicants and fellowship programs submittedrank order lists of positions and applicants, re-spectively, that are processed to produce a sta-ble match.

After 1996, however, the centralized matchbroke down and was abandoned. In 1996,around 300 positions participated in the match;by 1999 there were only 14; and in 2000 nocentralized match for gastroenterologists waseven attempted.

The demise of the match seems to have beenset in motion in 1993–1994, when gastroenter-ology subjected itself to a manpower analysiscommissioned by the Gastroenterology Leader-ship Council (GLC) (Gregg S. Meyer et al.,1996). Its main conclusions were that the U.S.health care system and gastroenterologistswould benefit from a reduction in gastroenter-ology fellowship programs. The GLC endorseda goal of 25 percent to 50 percent reduction inthe number of GI fellows over five years. Fur-thermore, an additional year of training wasmandated: starting in the summer of 1996, threeyears of training, instead of two, were requiredto be board eligible.

That is, in 1996 the supply of gastroenterol-ogy fellowships was sharply reduced, by admin-istrative decision, and the time needed tobecome a gastroenterologist was increased by ayear (although some three-year fellowship pro-grams existed before 1996). This announced(and hence expected) reduction in supply, how-ever, triggered an even larger reduction in thenumber of residents who applied for GI fellow-ships. This seems to have been the start of thedemise of the match. In 1996, for the first time,and despite the reduction in the number ofpositions offered, there were fewer applicantsfor GI fellowship positions than there were

5 Understanding under what conditions stable matchessucceed is of lively interest in several contemporary designefforts. In New York City, the Department of Educationinitiated a stable match for the approximately 100,000 mid-dle school graduates who entered high school in September2004 (Atila Abdulkadiroglu, Parag A. Pathak, and Roth,2005). In Boston, a study of the existing, unstable matchingsystem is currently underway, with the goal of recommend-ing design changes. (In this connection, see Abdulkadiroglu,Pathak, Roth, and Tayfun Sonmez, 2005.) A recent antitrustsuit against the National Resident Matching Program(NRMP) prompted new legislation clarifying that such amatch does not violate antitrust laws (Public Law, 2004)and raised questions about how possible modifications in thematch would change the performance of the market (JeremyBulow and Jonathan Levin, 2004; Vincent P. Crawford, 2004).

879VOL. 95 NO. 3 MCKINNEY ET AL.: THE COLLAPSE OF A MEDICAL LABOR CLEARINGHOUSE

positions offered in the match. Despite the con-siderable reduction in the supply of positions,the market experienced a shortage in demandfor positions, as residents stayed away from themarket. This seems to have triggered a scrambleamong fellowship programs (see, e.g., Gerson,1999). Once the match broke down, and thecommitment to uniform late appointment datesvanished, the market for gastroenterology fel-lows once again experienced unraveling andexploding offers (William T. Bauer et al.,1999).

One hypothesis about what caused the de-mise of the gastroenterology match, put forwardby market participants in the gastroenterologyliterature, is that a centralized match can workonly when there is a surplus of applicants (FredS. Gorelick, 1999; Phillip P. Toskes, 1999).

Of course, there may be different kinds ofperceived shortages of applicants. There maysimply be fewer applicants than positions, as in1996. A more subtle kind of shortage is thatthere may not be enough “high-quality” appli-cants to fill the high-quality positions. Indeed,the perception among some GI fellowship di-rectors is that, even though there are now onceagain more applicants than positions, there arenot enough high-quality applicants. Of course,such perceived shortages can also arise in theeyes of applicants, regardless of the number ofpositions available. In many markets, there ap-pears to be a perception among participants onboth sides of the market that they are on thelong side (i.e., there are never enough high-quality opportunities on the other side of themarket) (cf., Toskes, 1998).

The matching algorithm used by the NRMPto conduct the medical matches generates astable outcome regardless of any shortages ofpositions or applicants. The incentives, how-ever, for programs and applicants to participatein the centralized match, or strike a deal outsidethe match, may change in response to changesin supply and demand.

Before we present further hypotheses aboutthe demise of the GI match, we first need toconsider the difference in the strategic optionsfacing firms (fellowship programs) and appli-cants. Two asymmetries seem particularly im-portant in the present instance:

(a) Asymmetry of actions: In both centralizedand decentralized markets, applicants apply

to firms to be considered for a position (e.g.,apply for an interview). In decentralizedmarkets, or when firms do not wait for acentralized market, firms then make offers,and applicants decide whether to accept orreject them.

(b) Asymmetry of information following ashock: Receipt of applications gives firmsan informational advantage; they know ifthey are getting many or few applications,and hence they have an early indication ofshifts in the demand for positions. In con-trast, information about the supply of po-sitions is common to both firms andapplicants, since available positions areannounced well in advance. And in theabsence of a shock, historical informationwill be a reliable guide to both firms andapplicants.

This suggests three related hypotheses aboutwhy the shortage of applicants for gastroenter-ology positions in 1996 set off the collapse ofthe match. Each is a special case of the previoushypothesis:

(a) The success of this kind of match dependson there being more applicants than posi-tions: the centralized match fails when thereare fewer applicants.

(b) The match failed because there was a shockthat reduced the demand for positions be-low the supply, but the match could haverecovered from this shock if given thechance, once supply and demand stabilized.

(c) The match failed because there was a shockthat reduced the demand for positions be-low the supply, and because firms knew this(because they could see their reduced appli-cant pool) and applicants didn’t. However,the match could have recovered from thisshock if given the chance, once supply anddemand stabilized, since then applicantswould no longer be at an information dis-advantage to firms.

While all three hypotheses take as their basisthe fact that the gastroenterology match startedto unravel the first year in which demand forpositions was lower than supply, they differ intheir implications for a reorganization of thegastro match, for what we should expect to findin other markets with and without successful

880 THE AMERICAN ECONOMIC REVIEW JUNE 2005

centralized clearinghouses, and for how suchsupply and demand shocks might be managedin the future.

II. Experiments

We create a simple matching environment inwhich to study the effects of both stationary im-balances in supply and demand and of shocks thatcreate a shortage of applicants. In each experimen-tal condition, subjects first gain experience of un-raveling by participating in 15 decentralizedmarkets. They then participate in 15 markets inwhich centralized matching is available to sub-jects who choose to wait and use it. In the treat-ments that involve a shock, the shock occurs afterthe thirtieth market, and subjects participate in anadditional 15 markets after the shock, with cen-tralized matching available for those who wait touse it. (We use single shocks that reverse imbal-ance between demand and supply of positions,such as we observed in the market for gastroen-terology fellowship positions.) Firms and appli-cants are always fully informed about the numberand types of firms in the market. We vary theinformation that applicants have about other ap-plicants, and examine markets either with full in-formation, in which firms and applicants have thesame information about supply and demand, orpartial information, in which only firms are di-rectly informed about the number of applicants.(The partial information condition is intended tolet us observe the market in conditions like that ofthe 1996 shock to the gastro market, which unex-pectedly reduced the number of applicants.)

A. The Environment6

Participants in the experiment are assignedthe role of either a firm or a worker (i.e., anapplicant for work), of one of two types, high orlow. Each subject maintained the same role(e.g., as a high firm) throughout all the marketsin an experimental session, and no subject par-

ticipated in more than one session.7 In eachmarket, firms can match to at most one worker,and each worker can match to at most one firm.For each participant, a match to a high type isworth 150 points plus or minus a private valuebetween 0 and 10 points. A match to a low typeis worth 150 points plus or minus a privatevalue between 0 and 10 points. Participantsknow other participants’ types, but not theirprivate values (although each participant knowshis own private values for others).

Markets are divided into three periods, and ineach period, firms that are not yet matched canmake up to one offer. After all the firms makeoffers (or choose not to make an offer), workersaccept or reject offers. An offer contains thetype and an identification of the firm that madethat offer. A worker who receives several offerssees them only one at a time, in a random order.That is, these are “exploding” offers: a workermust choose to accept or reject each offer with-out knowing whether he has any more offerscoming in that period. Workers can accept onlyone offer per market. Accepted offers are an-nounced to all participants in any subsequentperiod, while unaccepted offers remain private.Matched firms are no longer allowed to makeoffers and unmatched firms cannot make offersto matched workers.

In the gastroenterology labor market, costs ofunraveling consist of many components forboth firms and workers, including uncertaintyabout the quality of the match and loss of plan-ning flexibility. In our experiment, we modelthese various costs simply by imposing a fixedcost of contracting early (as in Kagel and Roth,2000). In particular, each market lasts for threeperiods, denoted periods �2, �1, and 0. Tomodel costs of unraveling, each participant whomatches in period �2 incurs a cost of 20 points,and each participant who matches in period �1incurs a cost of 10 points. The penalties formatching early are deducted from the partici-pants’ earnings. Subjects who failed to matchby the end of period 0 receive 0 points for that

6 Our environment is similar to the experimental envi-ronment in John H. Kagel and Roth (2000), with some smallprocedural changes. So our results prior to the introductionof shocks serve to replicate their results and add confidencethat they are not the artifact of some of the specific proce-dural choices. The imbalances in demand and supply, andthe shocks that are the subject of this experiment, are unlikethe treatments in prior experiments.

7 In the gastroenterology market, like other entry-levellabor markets, only employers tend to participate in manymarkets. Applicants, however, have many opportunities tolearn from and about the experience of previous years fromcolleagues, advisors, and publications. For simplicity, thepresent experimental design gives both sides of the marketexperience in the same way.


market. Participants receive $0.008 for eachpoint plus a $10 show-up fee.

There are two kinds of markets:

(a) In a decentralized market, firms have threeperiods to match by making offers to work-ers, who can accept or reject the offers.

(b) In a centralized market, the first two periodsare as in the decentralized market. But in thelast period, period 0, all firms and workerswho have not already matched in periods�2 and �1 are matched at the firm-optimalstable matching.8

In each experimental treatment there are threelow-type firms and three low-type workers. Wevary the number of high-type firms and workersto induce demand and supply imbalances andthe kinds of demand shocks as experienced bythe gastroenterology market.

Fixed Demand Treatments.—To test for ef-fects of demand and supply imbalances, wehave three treatments, determined by the num-ber of high-type firms and workers. “3 Firms–3Workers” is the treatment in which there arethree high-type firms and three high-type work-ers (in addition to the three low-type firms andworkers). We compare the outcome of the foursessions of this balanced treatment to the sevensessions in which there is excess supply ofworkers (3 Workers–2 Firms) and the sevensessions in which there is an excess supply offirms (3 Firms–2 Workers). In all three treat-ments, both firms and workers are informedabout demand and supply, and participate in 15decentralized markets followed by 15 central-ized markets.

The Shock Treatments.—The shock treat-ments started out with three high-type firms andfour high-type workers. Then, after market 30,there was a single shock, eliminating two high-type workers and hence resulting in a shortage

of workers from markets 31 to 45.9 We ran 10sessions of each of those treatments.10

The shock conditions were conducted underone of two information conditions, full or par-tial information. (The conditions without ashock were all conducted under full informa-tion.) In both information conditions, firms andworkers are fully informed about the numberand quality of firms in the market. Firms alsoknow the number and quality of workers. Theinformation condition affected whether workersknow about the number and quality of workers.

(a) Full information: Workers are fully in-formed about the number and types ofworkers in each market. So when there is ashock that changes the number of workers,the workers know about the shock as soonas the firms do.

(b) Partial information: Workers are not in-formed about the number and types ofworkers in each market. So when there is ashock that changes the number of workers,only the firms can see the shock at the startof the market. Workers find out about otherworkers only when early matches aremade.11

B. Experimental Results

As in Kagel and Roth (2000), the data arebest explained by examining the high-type par-ticipants, since low types almost universallyparticipate in the centralized match once it be-comes available.12 To filter out the high-low orlow-high matches that occur from the imbal-ance of supply and demand, in each market we

8 When the MSMP operated the gastroenterology match,a version of the firm-optimal deferred acceptance algorithmwas used. For ongoing matches, the MSMP subsequentlyfollowed the NRMP in adopting the Roth-Peranson (1999)algorithm, built around an applicant-optimal deferred-acceptance algorithm.

9 Under the full information design, the two workers whodrop out after market 30 collect their payments and leave,while the others finish the last 15 markets. In the partialinformation condition, these two workers are told to remainquietly at their workstations so as not to signal to the otherparticipants that they have been removed from the market.

10 All fixed market sessions and four of each of the shocksessions were run in the winter and spring of 2001–2002.Six sessions of the shock treatments were run in the summerof 2003.

11 Accepted offers are made public, along with the typeand identity of the firm and worker.

12 Figures for the low-type participants, screen shots ofthe experimental conditions, and experimental instructionsare found in McKinney et al. (2004) and are also availableat http://www.stanford.edu/�niederle/gastro.experiment.pdf.


look at the high types on the short side of themarket. That is, we are concerned whether themaximal number of possible high-high matchesare achieved in each market.

Figure 1 graphs the percentage of high-to-high matches that are made late (i.e., in period0). For the sessions that experienced shocks inthe balance of supply and demand followingmarket 30, the figure shows how participation inthe centralized clearinghouse reacted to theshock, in both the short term (markets 31–35),and over the longer term (markets 31–45), un-der the new post-shock conditions of workershortage.

To analyze the data, for each session we useaverages over five markets (as in Figure 1) asdata points. To analyze differences within treat-ments, we use the Wilcoxon matched-pairssigned-rank test, while we use the Mann Whit-ney test for differences across treatments.

The Effects of a Centralized Match underConstant Market Conditions.—For all fivetreatments, the decentralized market exhibitssubstantial early contracting. Furthermore, mar-

kets 6–10 experience the same amount of latecontracting as markets 11–15.

For all five treatments, the introduction of thecentralized match increases the percentage ofmatches that are made efficiently late: markets16–20 are significantly different from markets11–15 in all treatments.13 The success of thematch is virtually the same across conditions.14,15

13 The Wilcoxon matched-pairs signed-rank test, com-paring the proportion of late matching in markets 11–15with the proportion of late matching in markets 16–20 in the10 pairs of each of the full and partial information treat-ments, yields p-values of 0.04 and 0.01, respectively. Sim-ilar Wilcoxon matched-pairs signed-rank tests yieldp-values of 0.07 for the four pairs in the 3 Firms–3 Workerstreatment, 0.02 for the seven pairs in the 3 Firms–2 Workerstreatment, and 0.03 for the seven pairs in the 2 Firms–3Workers treatment.

14 Comparing the percentage of late matches in markets26–30 across all conditions using the Mann Whitney test,we find p-values that are 0.4 or higher.

15 For all the markets in which there are three possiblematches between high-type agents, the effectiveness of thecentralized match increases as the participants gain experi-ence with it: there is significantly more late matching inmarkets 26–30 than in markets 16–20. The Wilcoxon

FIGURE 1. PERCENTAGE OF HIGH MATCHES THAT ARE MADE IN PERIOD 0


Both when there was a shortage of firms andwhen there was a shortage of workers, a cen-tralized market was effective in increasing thepercentage of late matches. This increase in latematches is due to a somewhat more efficientperiod 0 matching mechanism, and mostly to areduction in early matchings.16

There is no suggestion in the data that cen-tralized matches work well only when supplyand demand are balanced, or only when firmsare on the short side of the market. In each ofthe experimental sessions with no shocks (orbefore the shock), the centralized match, onceintroduced, achieved a steady rate of participa-tion, suggesting that it is robust to varying con-ditions of supply and demand. Our resultsreplicate and extend those of Kagel and Roth(2000) to the current environment.

The Effect of the Shock.—We are now in aposition to consider the effect of the shock thatchanges the market from one in which workersare in excess supply to one in which they are inshort supply, starting in market 31. We havealready seen that the centralized mechanism iswidely adopted when it is available. In bothinformation conditions its adoption improvesefficiency, resulting in significantly higher totalpayoffs to firms and workers.17 Prior to theshock there are no important differences be-tween the two information treatments.18

Following the shock that removes two high-type workers, unraveling reoccurs in markets31–35 in both information conditions, but onlymarginally in the full-information condition,and significantly in the partial-information con-dition. The Wilcoxon matched-pairs signed-rank test that compares the proportion of latematches in markets 25–30 with that in markets31–35 in the 10 matched pairs of the partialinformation treatment yields a p-value of 0.01,and the test in the full information treatmentyields a p-value of 0.26.19

The impact of the shock is significantlygreater in the partial information treatment. Par-ticipation in the centralized match falls by 9.3percent under full information, and 30 percentunder partial information when comparingmarkets 31–35 with markets 26–30. A Mann-Whitney test confirms that the lack of informa-tion leads to significantly more unraveling (p �0.05).

After the shock, the amount of unraveling(early matching) in the partial information treat-ment, 47 percent (in markets 31–35), is compa-rable to the one in decentralized markets, 52percent (in markets 11–15). A Wilcoxon matched-pairs signed-rank test delivers a p-value of 0.33.In contrast, under full information there is no-where near as much unraveling after the shock(24 percent) as there was in the decentralizedmarkets (55 percent): a Wilcoxon matched-pairs signed-rank test yields a p-value of 0.007.Furthermore, there is a significant treatment ef-fect; that is, the significant change of unravelingin the full information condition is significantlydifferent from the (small) change in unravelingin the partial information condition. A Mann-Whitney test on the differences in the propor-tion of early matches (n � 20) delivers ap-value of 0.058, a significant effect.

matched-pairs signed-rank tests yield p-values of less than0.01 for both the full and partial information treatment, andyields p � 0.07 for the 3 Firms–3 Workers treatment. Whenthere are only 2 high matches, the change is not significant;the p-values are 0.102 and 0.369, respectively.

16 Indeed, comparing the proportion of early matches inmarkets 26–30 with the proportion in markets 11–15, aWilcoxon matched-pairs signed-rank test for the 10 pairs ofthe full and partial information treatments yields p-values ofless than 0.01; for the four pairs of the 3 Firms–3 Workerstreatment the p-value is 0.068; and for the seven pairs ofeach of the 2 Firms–3 Workers and the 3 Firms–2 Workerstreatment the p-values are 0.022 and 0.05, respectively.

17 A Wilcoxon matched-pairs signed-rank test compar-ing earnings in markets 16–20 with markets 11–15 in eachof the 10 pairs yields values of p � 0.01 for both the fullinformation treatment and the partial information treatment.

18 Mann-Whitney tests comparing the average propor-tion of late matching between the 10 sessions in eachtreatment yield p-values of 0.44 for markets 11–15, the lastdecentralized markets; 0.49 for markets 16–20, the firstcentralized markets; and 0.84 for markets 26–30, the lastcentralized markets before the shock. Similar results areobtained when looking at the proportion of early matches.

Furthermore, there are no differences in the changes in theproportion in late matchings between the full and the partialinformation treatment, for the introduction of the central-ized match (markets 16–20 minus markets 11–15), theincrease in adoption of the match (markets 26–30 minusmarkets 16–20), and the difference in late matching be-tween the last centralized markets and the last decentralizedmarkets (markets 26–30 minus markets 11–15). Similarresults hold for the proportion of early matches.

19 Whenever a centralized match is in place, there arevirtually no high matches that fail to form; that is, thereduction in participation in the centralized match almostequals the increase of early matchings.


By the final five markets, markets 41–45,about 80 percent of the participants are againmatching late (with at least half the groupsin each treatment having 100 percent latematches). That is, the effect of the shock, minorin the full information condition and muchlarger in the partial information condition, istransient in both conditions. The effect of work-ers not having information about the number ofother workers diminishes as they gain experi-ence of markets with no subsequent shocks inthe number of workers.

To understand the effect of the shock, andwhy it affects the partial-information conditionso much more than the full-information condi-tion, we look at the pattern of early offers byhigh-quality firms to high-quality workers, andthe high-quality workers’ acceptance or rejec-tion of these offers following the shock. We willsee that, after the shock, when there is a short-age of high-type workers, firms increase thenumber of early offers they make. But the work-ers accept these offers much less frequently inthe full-information condition, in which theyknow they are now on the short side of themarket, than in the partial-information condition.

Figure 2 shows the normalized percentage ofhigh-type workers who receive an offer from ahigh-type firm, and the solid part of the barshows the proportion that accept those offers.The percentages are normalized once again bythe number of high-type participants on theshort side of the market, and also by the numberof high-type participants remaining on the mar-ket. That is, we report the number of high-typeworkers who receive an offer from a high-typefirm divided by the number of high-type work-ers who could have received an offer from ahigh-type firm, had all the (remaining) high-type firms made offers to different high-typeworkers. (The numerical percentage on top ofthe bar and the height of the solid part of the barindicate the percentage of these offers that wereaccepted.)

Behavior in the decentralized markets is notsurprising. In both treatments the firms areaware that they are in short supply, but to avoidcongestion in period 0, a number of early offersare made and most are accepted. In markets16–30, the centralized match solves the conges-tion problem and removes the incentives forhigh-quality firms to make early offers to high-quality applicants. The number of such offers

falls significantly.20 The proportion of early(period 1) offers continues to fall as marketparticipants become experienced with the cen-tralized match.21

After the shock, firms are now on the longside of the market and have incentives to makeearly offers to secure a high-type applicant. Inboth treatments, offers in period �1 increasesignificantly, by 49 and 62 percentage points,for the complete and partial information treat-ment respectively (with Wilcoxon matched-pairs signed-rank tests comparing separately ineach of the ten pairs markets 26–30 with mar-kets 31–35, yielding p-values below 0.01 ineach case).

However, the reaction of applicants differssharply between treatments. While firms havean incentive to make early offers to secure ahigh-type applicant, applicants now would dobetter not to accept such early offers. In thepartial information treatment, however, appli-cants are unaware of this change: 55 percent ofthe workers accept offers made in period �1 inmarkets 31–35, compared to 32 percent underfull information. (The difference between thetwo information conditions is significant; theMann Whitney test (n � 20) yields a p-value �0.0373.)

Overall, our experimental results show that ashock to the number of applicants that reversesthe imbalance of supply and demand and makesapplicants the short side of the market, like theone that the gastroenterology market experi-enced in 1996, can affect participation rates inthe match. The experiments show that this isparticularly so when workers do not realize that

20 The proportion of high-quality applicants who receivean offer from a high-quality firm in period �1 falls by 18percent after the introduction of the centralized match (mar-kets 16–20) in the complete information treatment, and by22 in the partial information treatment, compared to theaverage proportion over the last five markets before thematch (markets 11–15). Both reductions are significant; aWilcoxon matched-pairs signed-rank test on each of the tenpairs yields p-values of 0.07 and 0.01, respectively. Com-paring the ten pairs of markets 6–10 with 11–15 yields nosignificant effect (p � 0.4) and only changes of 3 or 4percentage points.

21 From markets 16–20 to 26–30 (from the first five tothe last five markets in the match before the shock), theproportion of early offers falls by 20 and 18 percent for thecomplete and partial information treatment, respectively, asignificant difference (p � 0.01 with a Wilcoxon matched-pairs signed-rank test).


they are, unexpectedly, on the short side of themarket. The results thus tend to support ourthird hypothesis, that the match failed becausethere was a shock that reduced the demand forpositions below the supply, and because firmsknew this and applicants did not. (Recall howthe low demand for positions in 1996 was anunexpected shock.)

III. Connections to Other Markets

A large part of economics is devoted to in-vestigating what markets accomplish at equilib-rium. But we know much less about themechanics of how markets clear, or fail to. Thisgap in what we know is particularly acute formarkets, like labor markets, in which workers

FIGURE 2. OFFERS, ACCEPTANCES, AND REJECTIONS

Notes: The percent on the vertical axis is normalized by the number of high-type participants on the short side of the marketwho are still available. Thus, in markets 1–30, a bar of total height 100 percent in period �2 would imply that each of thethree high firms made offers to a different high-type worker. A bar of total height 100 percent in period �1 or 0 implies thatall remaining high-type workers minus one (as high-type workers are on the long side of the market) receive an offer froma high firm. (The numerical percentage on top of the bar, and the height of the solid part of the bar, indicate the percentageof these offers that were accepted.) After the shock, in markets 31–45, a total height of 100 percent in period �2 implies thatboth of the high-type workers received at least one offer from a high firm. In period �1 or 0, a total height of 100 percentimplies that each remaining high-type worker received an offer from a high firm.


and jobs are heterogeneous, and so an offer isnot just a price offered to the whole market, asin a financial or commodity market. Marketfailures offer a window through which to inves-tigate this process, and the gastroenterologymarket offered a particularly clean transitionfrom a late, efficient market organization to onewith early, dispersed offers.

In the laboratory, we can see that whenmatchings become early, they become ineffi-cient, in that they don’t maximize the sum ofparticipants’ welfare. And in the field data,Niederle and Roth (2003b) found that whengastroenterology fellowship positions were of-fered through a centralized clearinghouse, themarket became significantly more national thanit was before the match, or since its demise. Themobility of GI fellows, as measured by whethertheir GI fellowship is in the same hospital, city,or state as their former residency, significantlyincreased with the use of a centralized match.22

For many markets (and marketplaces), theability to achieve efficient gains from trade hasto do with some aspect of the thickness of themarket, of how many possible transactions cansimultaneously be considered. Dispersion of of-fers in time is one of the things that can dimin-ish a market’s thickness, since agents on bothsides of the market are faced with sequences ofchoices among very few alternatives.

Our results suggest that markets unravel, andthickness is lost, when applicants lose their abil-ity to reject early exploding offers. In the gas-troenterology market, this seems to haveresulted from a situation that temporarily cre-ated incorrect beliefs about supply and demand.More generally, unraveling requires conditionsin which there are both firms that want to makeearly offers and applicants who want to acceptthem. To create thickness, a market must beattractive enough so that participants want towait to transact in it, and safe enough for themto do so (Niederle and Roth, 2004b).

This generalizes to other contemporary mar-ket failures as well. The market in which federalappellate judges in the United States hire newgraduates of top law schools as law clerks has

also been afflicted with unraveling of appoint-ment dates. In that market, applicants are strik-ingly reluctant to reject offers by federal judgeswho have interviewed them, and indeed it issometimes an explicit condition for receiving aninterview that an offer will be accepted if made(Avery et al., 2001; Edward R. Becker et al.,1994; Ernan Haruvy et al., forthcoming). Muchof the market for admission to elite undergrad-uate colleges has moved early in a similar way,with some colleges explicitly using “bindingearly decision programs” that favor applicantswho apply early to only one college, on theunderstanding that they will attend if accepted(Avery et al., 2003). In both of these markets,like the gastroenterology market, applicants areat least sometimes faced with early options thatthey may not hold and compare with other po-tential offers.

The results of the present experiment suggestthe hypothesis that this ability to compare (andreject) offers may be one of the critical butfragile determinants of how well such marketsclear.

IV. Conclusions

The results of the experiment suggest that thecollapse of the gastroenterology match was re-lated to the peculiar situation in which the gas-troenterology profession found itself in the late1990s. After a reduction in the number of gas-troenterology positions, the market neverthelesssuffered such a shortfall in applicants that ap-plicants were in shorter supply than positions.Not only did this give fellowship programs in-centives to fill their positions early, it also madeapplicants (who knew of the reduction in posi-tions, but not of the shortage of well-qualifiedapplicants) eager to accept offers whenever theyreceived them.

The results of the experiment also suggestwhy failures of stable matches are rare. Antic-ipated imbalances in supply and demand, visi-ble to both sides of the market, did not causedeclines in match participation of anywherenear the magnitude caused by the unanticipatedshock that created a shortage of workers (whichworkers were initially unaware of). And whilesupply and demand shocks themselves may notbe rare in these labor markets, shocks thatchange which is the short side of the marketappear to be quite rare. None of the other internal

22 Guillaume Frechette et al. (2004) show using Nielsenratings of college football bowl games that unravelingcaused inefficiencies in the early 1990s that have beenreduced by later matching.


medicine subspecialty matches (cardiovasculardisease, pulmonary disease, and infectious dis-ease) experienced such a shock.23

Since the loss of the match, the number ofpositions has again stabilized, raising the ques-tion of whether this market might be able suc-cessfully to employ a match again. Our resultssuggest that a centralized match would onceagain be successful. And reintroducing a cen-tralized match would increase the scope of themarket and the mobility of gastroenterologists,as well as allowing matches to be made aftermore information has become available.

In summary, this paper exploits a rare event—the failure of the stable matching mechanism usedto organize the market for gastroenterologists—toexplore how such clearinghouses fail, and whyfailures are rare. The fact that the failure of thegastroenterology match seems to have been theresult of an unusual, one-time shock to the markethelps us to advise gastroenterologists that it ap-pears that a reintroduction of the match wouldonce again be successful.24 And the fact that sim-pler shocks do not disrupt the operation of thematch explains in part why this kind of clearing-house has operated so successfully, over manyyears, in markets that have certainly experiencedshocks in supply and demand.

More generally, while theories of equilibriumdo a good job of explaining what marketsshould do when they clear, we have few de-scriptions of how markets (especially those thatare not commodity or financial markets) doclear. The results of the experiment reportedhere underline the importance of those elementsof the market environment that gave applicantsthe confidence to decline early offers.

REFERENCES

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23 From 1990 to 1998, the ratio of applicants to positionsoffered in the cardiovascular match varied from a high of1.6 to a low of 1.3. For pulmonary disease, those ratiosvaried from a high of 1.5 to a low of 1.1, and for infectiousdisease (from 1994 to 1998), those ratios vary from a highof 0.92 to a low of 0.68 (Niederle and Roth, 2004a). Thus,unlike in the gastroenterology market, the short side of thesemarkets did not change, although in infectious diseases theapplicants were in short supply, and in the other matches thepositions were in short supply. Our experiments provide anadditional data point that markets in which applicants are inshort supply may be as stable as markets in which applicantsare abundant, and that the success of the market for infec-tious disease fellowships is not an anomaly.

24 And, indeed, it appears that the GI match will berestarted in the near future (Niederle and Roth, 2005).


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