1. MAHIMA CHAWLA ELIZABETH GORDON The Adoption Market: How can the number of parent- child matchings be increased?

2. Overview How does the domestic US adoption market work? What are the problems with the adoption market? Literature solution: Auctions & Subsidies Our solution: Add a monthly fee to waiting time

3. Defining Terms High quality child (HQ): Healthy and Young Low quality child (LQ): Unhealthy and Old Matching: a pairing between adoptive parent(s) and child that results in legal adoption of child Acceptable Threshold: the minimum quality child that adoptive parents are willing to adopt for a given monetary cost of waiting

4. How does the domestic adoption system work? 2-sided market Public and private adoption agencies Price cap for adoption Steps for adopting a child: 1. Select an adoption agency 2. Complete screening and home-study (fee required) 3. Social worker searches for, identifies and evaluates multiple potential children (search and information exchange period) 4. Child’s social worker makes final decision on adoptive parents

5. The problem in the adoption market What is the problem? Shortage of high quality children and surplus of low quality children indicate the market is not clearing Why is this a problem? The goal of the adoption markets is to maximize the number of matchings Shortage of HQ children = parents left without a child Surplus of LQ children = children left without a parent Looking forward… Can we increase the number of matchings in the adoption market by making previously unacceptable matches acceptable and matching unmatched children to unmatched parents?

6. What causes this problem? Literature says the problem is the result of adoptive parents’ preferences  Young children > Old children  Healthy children > Unhealthy children Result:  Demand for HQ children > Demand for LQ children However, this only causes a problem when a price cap is introduced…

7. How does the shortage of HQ children arise? Price Cap Demand Supply Quantity Price $30,000 Shortage

8. How does the surplus of LQ children arise? Quality of Baby A A NA Stage 1 x 2x # babies T* Quality of Baby NA A A Stage n x (n+1)x # babies T* A A Stage 0 x Quality of Baby # babies T* NA T* =adoptive parents’ acceptable threshold with no monetary cost of waiting A = children adopted NA = children not adopted

9. How can the number of matchings in the adoption market be increased? Literature solution Blackstone presents an auction and subsidy solution to match otherwise unmatched children and adoptive parents Our solution We suggest adding a monthly fee, paid from adoptive parents to the social worker, during the search and information exchange period of adoption

10. How is the adoption market currently like an auction? Blackstone likens adoption market to fixed-price all- pay auction Fixed-price: Fixed fee for adoption based on costs; these are not related to quality of the child  No benefit to paying more, no option to pay less All-pay: Fees paid and time spent waiting are sunk costs unrelated to whether adoptive parents receive a child.  Unmatched parents still pay fees

11. Blackstone’s proposed auction solution… An all-pay simultaneous ascending auction with a bid cap  All-pay: ensures parents with a strong motive will participate  Simultaneous: results in more aggressive bidding  revenue maximizing  larger endowment  Bid Cap: incentivizes low-income prospective parents to participate

12. Blackstone’s auction solution continued… Adoptive parents submit bid for a child or split their bid among multiple children Multiple bidding rounds until one set of adoptive parents remains  receives child End of each round, bids are pooled and allocated as a subsidy to low quality children based on health costs Result: Unmatched parents unable to obtain a high quality child begin bidding on endowed low quality children  increase matchings

13. Quality of Baby NA A A Stage n x (n+1)x # babies T* Quality of Baby NA A A Stage n x (n+1)x # babies T* A A Changing “effective quality” of a child with endowments Effective quality = child’s quality relative to adoptive parents’ threshold

14. Problems with Blackstone’s auction and endowment solution Placing a price/bid on a baby is often seen as socially unethical It is unclear how ties are broken when the bid cap is reached by multiple bidders in a round. Difficult to implement logistically and disseminate information Makes the adoption market one-sided instead of two-sided

15. Motivations for our solution Recall our solution:  Add a monthly fee to search period Search theory: “studies buyers or sellers who cannot instantly find a trading partner, and must therefore search for a partner prior to transacting” McCall has a paper on job search and suggests “as c increases, the length of search decreases” o c = Marginal cost of generating another job offer o Reservation wage declines over time as worker runs out of money while searching

16. Applying McCall’s job search to the adoption market Proposal: By adding a monthly cost to the search period, we can reduce the length of search period and thus increase the number of matches in the adoption market The monthly fee equivalent to “c” Reservation wage equivalent to acceptable threshold Reservation price is the maximum that an adoptive parent is willing to pay to obtain a child

17. Current system of fixed fees Adoptive parents face fixed monetary costs regardless of waiting period  No monetary cost to preferring HQ children  No monetary costs to having a high acceptable threshold Incentive to remain in search period until either a HQ child is obtained or frustration lowers acceptable threshold  long search period Result: shortage of high quality children and surplus of low quality children

18. How does a monthly fee affect length of search period? By adding a monthly fee, the search period becomes a fixed amount of time dependent on adoptive parents’ initial reservation price Reservation price declines over time as adoptive parents shell out money As time approaches n, adoptive parents will risk leaving the market unmatched How would you react to approaching time n? Time Reservation price n

19. Understanding quality as a spectrum While we have been defining children as “HQ” and “LQ”, it is important to remember that a child’s quality falls on a spectrum.  Quality child A ~ Quality child B B B x Quality of Baby # babies T* A

20. Time Acceptable Threshold Tipping point Lowest acceptable quality Time Reservation price R0R0 Why impose a monthly fee? T* n Recall that the acceptable threshold is the minimum child quality that adoptive parents are willing to adopt for a given monetary cost of waiting As time approaches n: 1. Reservation price falls 2. Remaining search period decreases 3. Probability of finding a child above the initial acceptable threshold decreases 4. Taking into account added cost to waiting time, acceptable threshold falls Result: increase in the number of low quality children matched

21. Conclusion Goal: Increase the number of matchings in the adoption market Our Solution: add a monthly fee to the search period, ultimately lowering the parents’ acceptable threshold and increasing the number of matchings Further steps:  What is the optimal size of this fee to be effective?

22. References Blackstone, E., A. Buck, and S. Hakim. "Privatizing Adoption and Foster Care: Applying Auction and Market Solutions." Children and Youth Services Review 26.11 (2004): 1033-049. Blackstone, E., A. Buck, S. Hakim, and U. Spiegel. "Market Segmentation in Child Adoption." International Review of Law and Economics 28.3 (2008): 220-25. Goodwin, Michele. "The Free-Market Approach to Adoption: The Value of a Baby." Boston College Third World Law Journal 26.1 (2006): 61-79. Landes, Elisabeth M., and Richard A. Posner. "The Economics of the Baby Shortage." The Journal of Legal Studies 7.2 (1978): 323-48. McCall, John J. "Economics of Information and Job Search." The Quarterly Journal of Economics 84.1 (1970): 113-26.