Matching Markets with Mixed Ownership: The Case for A Real-life Assignment Mechanism

We consider a common indivisible good allocation problem in which agents have both social and private endowments. Popular applications include student assignment to on-campus housing, kidney exchange, and particular school choice problems. In a series of experiments Chen and Sönmez (American Economic Review 92: 1669-1686, 2002) have shown that a popular mechanism from recent theory, the Top Trading Cycles (TTC) mechanism, induces a significantly higher participation rate by agents with private endowments and leads to significantly more efficient outcomes than the most commonly used real-life mechanism, the Random Serial Dictatorship with Squatting Rights. We first show that a particular mechanism, the so-called New House 4 (NH4) mechanism, which has been in use at MIT since the 1980s, is in fact outcome-equivalent to a natural adaptation of the well-known Gale-Shapley mechanism of two-sided matching theory. This implies that the NH4 mechanism is the most efficient mechanism within the class of fair and individually rational mechanisms, and that it is essentially the only incentive compatible mechanism satisfying the two properties. We then experimentally compare NH4 and TTC. We find that under NH4, the participation rate is significantly higher than under TTC. We also propose a new efficiency test based on ordinal preference information and show that NH4 also outperforms TTC in terms of efficiency.