Jacob Goeree: Creating new markets for global impact

Professor Jacob Goeree, a Scientia Professor at UNSW Business School, is using the relatively new field of market design to create new markets which can be applied to areas as diverse as the local fisheries industry and China’s growing pollution problem.

Professor Jacob Goeree: My area of research is market design, which is a relatively new field in economics, and it actually has the potential to transform economics into somewhat of an engineering science.

For a long time economists have studied markets but we’re actually now at a time that economists can ask and answer the question, Well, if we have a certain goal, why wouldn’t we make an entirely new market?

So a good example of market design is the work I did for NSW Fisheries, and there were two problems to be resolved. One is you would like to prevent overfishing, to have a sustainable catch; and the other is to make the industry as healthy as possible.

There is no existing market where the fishers can buy and sell the shares, so we really needed to create a market. And it’s not a simple market – why not? Well, suppose that you are thinking of leaving the industry. So, you currently hold a portfolio of different shares for different types of fish, and potentially different methods of catching. You say, “Well, actually, I would like to sell,” but what could happen to you is that some shares are in higher demand than others. You sell those, but you cannot sell the remainder of your portfolio. So you’re sort of left caught halfway because the income from the shares you sold is not quite enough, and the shares that remain are not that interesting.

Doug Ferrell – Director, Fisheries Analysis, Department of Primary Industries: The problem we faced was very complex, and mathematically mind-boggling from my point of view. And there is no way to think this through with a pencil and paper.

Goeree: We designed a market in which fishes are protected against these bad outcomes. So basically, what it can do is offer their entire portfolio of shares, even though on the buy side there will be different fishers buying these separate share classes. And that’s really the innovation, and these markets are entirely new; you will not find them anywhere in the world.

Ferrell: The assistance from Jacob and his colleagues about modelling this in a computer system and solving the problem really showed us the power of a more bespoke and design market.

Goeree: The same cap and trade program can actually help to combat the pollution in China. Worldwide pollution must be among the top five problems to be solved.