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

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.