Solving the Puzzle of Matching Markets: A Path to Better Outcomes and Reduced Disputes

A month ago I was listening to the episode “Make Me a Match (Ep. 209 Update)” on one of my favorite podcasts, Freakonomics Radio. The episode delved into matching markets and kidney transplants. The first part of the episode was a discussion with Nobel Prize winning economist Alvin Roth, a specialist in markets. He focuses on complex markets where both the buyer and seller must “choose” each other, and where the sole determinant is not price (e.g. commodities).

The latter half of the podcast focused on the specifics of the kidney transplant “market.” That is not the focus of this post, but the altruism of one of the podcast listeners literally made me tear up as he decided to donate a kidney just to help others. He studied Alvin Roth’s algorithm and understood that by donating a kidney to an unassigned person he could unlock a chain of transplants that could help many people and their families. This story was incredible because of both the altruism and that it would not have been possible without Roth’s market design. The next day I began devouring Roth’s book, “Who Gets What – and Why”. For a self proclaimed econ nerd, the book exceeded my expectations!

As I read, it became quickly apparent that matching markets are everywhere! In just the last month I participated in some of the most obvious: choosing a college for my daughter and hiring of employees. In both cases, money alone does not dictate the outcome. In the case of a college, I must be willing to pay the tuition, but just because I can (hopefully), doesn’t mean my daughter gets to attend there. The college must also choose her to create a match.

The same principals apply to the job market. Over the past few months, I have interviewed many people that wanted to join Aegis Project Controls . However, their desire alone is insufficient. We, too, must carefully evaluate whether they meet our stringent criteria. In other words, it wasn’t enough that they wanted to work here. Conversely, I couldn’t make an excellent candidate choose Aegis just because I thought they would be a good fit. We had to choose each other (in this instance, I'm confident we made amazing choices). I’ve been through this process enough to understand the main issue with matching markets is inadequate information. Sometimes the lack of information, or the dissymmetry, can cause bad matches.

After reading the book, I realized that these markets are everywhere … including in construction. While price can be a major factor that guides transactions in the construction market, there are several other factors to consider besides just the price. Construction projects are unique and complex and require specialized skills and expertise. By definition, this uniqueness makes the construction market a matching market. Owners (buyers) and sellers (contractors, and subcontractors) need to choose each other based on various criteria.

Some construction transactions are treated as commodities, such as a selection based on low bid alone. Anecdotally, as a dispute resolution expert, it is my view that these types of transactions tend to lead to more disputes in the long run. A better process is when contractors and subcontractors submit bids, taking into account factors such as:

- project specifications (complexity and size)

- timeline

- quality standards

- reputation

- capabilities

- experience and track record, and of course,

- cost

This is the value-based method and it involves a mutual selection process. Owners aim to choose the most qualified and competitive contractor for their project, while contractors seek projects that align with their capabilities and profitability goals. The matching process often involves negotiations, contract agreements, and collaborations between the selected contractor and the owner. This approach does not eliminate disputes, but when complex matching occurs, the likelihood decreases.

Even a Request For Proposal (RFP) process like the one described above does not remove the challenges of a matching market. Sometimes the limitation is due to scarcity of resources. For example, when there is a high demand for construction services but a limited number of experienced contractors available, owners may struggle to find suitable matches for their projects. Similarly, contractors may face difficulties in securing projects that meet their specific criteria due to intense competition or limited opportunities.

Like the consultant hiring market, inadequate information can also lead to suboptimal matches. Both owners and contractors require accurate and comprehensive information to make informed decisions. Insufficient data regarding project requirements, contractor capabilities, market conditions, and industry standards can result in mismatched projects, delays, cost overruns, or unsatisfactory outcomes.

In order to reduce disputes, it is my belief that greater efforts should be made to try and make the best matches. Owners need to do their best to provide clear and complete project information in their RFPs or Invitations to Bid (ITB). This will allow contractors to make more accurate assessments. On the other hand, contractors need to be able to demonstrate how they can best meet the requirements. In addition to the traditional methods of marketing and maintaining a strong reputation, this can increasingly be accomplished through digital platforms and technologies that can facilitate better information sharing.

By understanding how matching markets work and thinking about strategies that can make the best matches, both owners and contractors can increase the chances of achieving excellent outcomes and projects that have a better likelihood to avoid disputes.

Referenced Links:

Freakonomics: "Make Me a Match" https://freakonomics.com/podcast/make-me-a-match-update/

Alvin Roth, "Who Gets What - and Why": https://www.amazon.com/Who-Gets-What-Why-Matchmaking/dp/0544705289/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=1688566933&sr=8-1