Concept Paper

(Formal Business Plan Pending)

Brian D. Hardy

November 26 1996



















All text and diagrams contained in this document are

Copyright (c) 1996 Brian D. Hardy. All Rights Reserved.

I. Introduction

There is nearly global consensus on the power of markets to efficiently distribute resources. Markets of all kinds--for stocks, bonds, securities, and diverse goods and services--now proliferate in places where centralized planning was only recently the rule.

When they perform well, markets can capture individuals' preferences, fulfill complex requests, and build productive and beneficial alliances. Where information is equally available to all participants, transactions are costless, and distribution biases are minimized, markets are also powerful mechanisms to increase both efficiency and fairness.

Although markets are both powerful and popular, with few exceptions, they are applied exclusively in relations between companies and organizations, not within them. This is where Marketect begins.

I am in the process of establishing Marketect with a circle of computer programmers, public policy students and an organizational psychologist, to focus the power of markets on solving problems within organizations and involving public goods. Each client organization may calibrate its internal markets and distribute scrip among customers, citizens, employees, etc., according to its own fairness and efficiency objectives. The clients then collectively guide the resource allocation process.

II. Equity and Efficiency Improvements on Commercial Markets

Commercial markets are not perfect. They are tainted by disparities in initial endowments, by allocation processes biased by race, class, gender and political affiliation, and by information asymmetry. Internal markets can avoid these problems.

A. Equal Initial Endowments

Internal markets allow organizations to control each participant's endowment, improving both fairness and efficiency. Fairness improves when all bidders begin on equal footing. Equal endowments also improve efficiency (Pareto optimality) by ascribing equal influence to each bidder and basing allocations solely on their marginal rates of substitution among goods.

B. Fair and Efficient Resource Allocation Processes

Marketect's tools are transparent and permit both formal and informal market processes. The formal processes are executed in the mind of a computer. These consist of politically neutral algorithms that use each bidders' reported preferences to estimate an efficient allocation. Transparency is enforced through explicit rules applied equally to all participants. Moreover, we are able to give each participant a step-by-step trace of the process leading to his or her formal assignment. Following the formal process, all bidders learn of their assignments and may informally negotiate adjustments among themselves.

C. Information Symmetry

The central administrators of each internal market can produce virtually perfect information symmetry by providing all bidders with identical data about their options and frequent updates on what other bidders are doing. Increased information symmetry improves both fairness and process efficiency.

III. Psychological Impacts on Group Culture and Behavior

Besides increasing the equity and efficiency of personnel processes, internal markets seem to have positive psychological impacts on participants. The following points are supported by our experiences with our first few clients. Future projects may reinforce these early observations.

Increased work motivation and reduced conflict

For teams and other working units within organizations, bid-driven decision-making processes elicit individual preferences in a manner perceived as fair and nonpartisan. This makes it easier for teams to depersonalize their interests, weigh alternatives and establish consensual team objectives. Identifying specific and mutually agreed-upon goals increases team work motivation. When goals are established and supported mutually, individuals are more invested in team success.

Internal markets are peacemakers. Because they allocate tasks and scarce resources among teams in a balanced fashion, friction among competing teams is reduced. They facilitate healthy competition while reducing the perceptions of bias that can contribute to intergroup conflicts.

Increased sense of control and satisfaction

Internal markets increase participants' sense of control over their environment, which has been recognized by personnel psychologists as a critical factor in job-related stress, absenteeism, and turnover. They accomplish this by giving each participant an opportunity to express detailed preferences and influence the organizationÕs decision-making process. A clear sense of participation and control contributes to personal satisfaction and organizational commitment.



IV. "Marketable" Objects:

Resources that are scarce and valuable, that are either private goods internal to organizations or public goods broadly available, can be allocated through internal markets. We place this universe of resources into three general categories:

1. Physical Resources:

Office space, parks and picnic grounds, conference rooms, company cars, shared laptops, etc.

2. Tasks:

News desk assignments, package deliveries, components of large projects, time shifts, etc.

3. Personnel:

Employees, volunteers, students, instructors, medical staff, etc.

V. Demonstration Projects

A. Example 1: Mentor-Protégé Pairing for The East Bay Outreach Project

In Fall 1996, we designed a system to pair young people with UC Berkeley MBA student mentors for the Young Entrepreneurs at Berkeley program. We designed forms similar to the following:

Once the young people and their mentors completed and returned their forms, we entered the data and an internal market worked to maximize common skills and interests and minimize geographic distance between mentor-protégé pairs. Program coordinators then reviewed the results.

In addition to completing matching forms, a few young people indicated specific mentors they preferred based on their personal interactions. In several cases, these picks matched the computer's assignment. When they did not match, the coordinators swapped mentors to fulfill their requests. This year's two-hour "review and adjust" process supplants a completely manual matching system used in the past that often required several days of deliberations before achieving satisfactory results.

B. Example 2: Group Assignment with the Elimination Auction

The elimination auction is the University of California at Berkeley's Graduate School of Public Policy's (GSPP) new group-assignment tool. It is coordinated by a computerized wealth-neutral auction. This transparent, 30-second process replaces an unsystematic manual procedure that consumed more than six hours of staff time during each cycle.

In the Spring, approximately 45 students receive a list of 20 potential Introductory Policy Analysis (IPA) projects collected by a professor. With a budget of 1000 "points," each chooses at least six projects of interest and distributes their points among them. They may bid no less than 10 points and no more than 950 on any single choice. Students may also identify up to three classmates they would rather not have in their group.

The auction alternates between assignment and elimination processes, assigning as many as possible to their first choice groups while eliminating groups in less demand. In trials, the elimination auction was able to assign students to groups of several target sizes (i.e., minimum group size of 3,4,5, etc.) and achieve 80%-90% of the satisfaction level that would result from each participant receiving his or her first choice without group size limits.

C. Example 3: Staff Rotation at Mexico's Ministry of Foreign Affairs

Description of the Current System

Every year the headquarters of Mexico's Ministry of Foreign Affairs in Mexico City rotates approximately 110 of its 900 administrative and diplomatic staff stationed around the world. Each rotating staff person fills a seat emptied by another. The current assignment process is managed by a staff committee in Mexico City that meets several hours every other week throughout the year. Within the agency, these meetings are widely considered expensive, boring, and inefficient diversions of staff energies from other essential tasks. Furthermore, many embassies and rotating staff distrust the process and are not satisfied with their assignments.

Designing A New System

In October 1996, Mexico's Ministry of Foreign Affairs commissioned several Marketect associates to reshape its staff rotation system. They requested that we begin immediately and present a functional prototype by April 1997.

Our proposed system uses "bids" submitted by the embassies and staff themselves to capture their preferences. Bids can be either "for" or "against" specific choices, and will be collected for a several-week, once-annual matching process. This system will replace a political and centralized system with one of decentralized control and equality among all bidders. The system will also have a "memory" that compensates bidders for poor assignments made in past rotation cycles.

VI. Matching Typology:

We have developed an eight-cell matrix of the matching processes Marketect's tools perform. Each cell represents a specific kind of relationship between "selectors" and "options". The selector is a person or entity with specified preferences that faces an array of objective options. Our tools can match each, several or all selectors with one, several, or all of their array of options.

Selectors 4 One/Same Several All
Options 6
One/Same 1. Each selector to one and only one option 2. Several selectors to the same option 3. All selectors to one option
Several 4. The same selector to several options 5. Several selectors to several options 6. All selectors to several options
All 7. One selector to all options 8. Several people to all options

Examples in Each Typology Domain:

1. One selector to one option

Match people with one and only one option. This technique can pair students and tutors, men and women, workers with partners, staff with offices, students with roommates, etc.

2. Several selectors to each option

This process assigns groups of people to project teams, shared housing, etc.

3. All selectors to one option

This builds group agendas, elects a leader based on multiple criteria voting, etc.

4. One selector to several options

This method assigns several options to each selector. Task allotment (e.g. dividing 100 tasks among 10 workers) is one example of this process.

5. Several selectors to several options

Match many people with multiple options, allowing overlap of both options and persons. This technique could make complex committee assignments, assigning each of, say, 50 staff persons to five of ten available committees, with each committee limited to 25 members.

6. All selectors to several options

Identify a few of the "best" options given the preferences of all participants. This method can help groups identify their best strategies.

7. One selector to all options

Assign all items to one person. This applies where a series of tasks requiring a range of skills must be completed by a single actor, to identify the "best person for the jobs."

8. Several selectors to all options

Assign all options to a selected group of people. This applies where tasks must all be completed by a select team of members from the larger group. This tool can be used to assemble a team with the appropriate skills and interests to complete all tasks.

VII. Other Potential Uses of Internal Markets

1. Resource allocation in social services--matching clients with counselors, training, and other resources;

2. Resource allocation in economic development. Matching entrepreneurs with lending institutions, potential business partners, and business resources(1)

;

3. Rotation systems for Embassies, Foreign Service, Peace Corps, and foreign exchange programs;

4. Improving matching processes in mentoring and tutoring programs;

5. Improving matching in adoption agencies and foster care services;

6. Roommate assignments, classroom and office assignments; and

7. Enabling resident-driven cueing of municipal projects.

1.

1A demonstration project is underway with The City of Oakland, California. The city's One Stop Capital Shop is experimenting with internal markets to build networks among entrepreneurs and match individuals with counselors and information resources.