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The Market for Kidneys in Singapore January 25, 2009

Singapore is lifting its ban on compensating kidney donors. Behind the cut, I’ll analyze some of the effects, examine the welfare generated by such a policy, and include a summary in the form of an economics haiku.

Here, BioEdge discusses the change to Singapore’s legislation:

Singapore is to allow compensation for kidney transplants and for eggs. A government proposal has been approved by a bioethics committee and legislation will be introduced early next year. The committee declared that reimbursement for kidney donation was acceptable as long as it is not “an undue inducement, nor amounting to organ trading”. … Other changes to Singapore’s legislation are contemplated: lifting the age of dead donors, which is now capped at 60 and allowing paired donation, in which a donor whose kidney is not a match for a relative, gives it to someone else, who also has a relative willing to give up a kidney.

I’d like to consider some of the ways in which this setup deviates from the theoretical perfect-competition model of supply, demand, and market-clearing price.

1. Most obviously, demand is perfectly inelastic. That may not be quite true, since a viable substitute good (dialysis) exists, but dialysis is both expensive and inconvenient. If the price of a kidney plus transplant was equal to the discounted present cost of continuing dialysis, I think it’s fair to say that the transplant would win every time. Bryan Caplan of Econlog agrees.
2. Supply, on the other hand, is more or less perfectly elastic. With rare exceptions, people are born with two functioning kidneys, of which, presuming they take care of themselves, they can function using only one. People have, presumably, a very high point of indifference for money versus kidney, but it exists for everyone. Therefore, supply will be entirely dependent on the government’s compensation limit.
3. Transaction costs are much higher than most goods. Black-market trade in organs to donate exists, of course, but to engage safely in a black-market kidney sale requires the cooperation of someone with at least some medical training.
4. Kidneys are not exactly fungible because of blood types, leading to a problem of double coincidence of wants. This is ameliorated in the law by allowing paired donation.
5. The government of Singapore isn’t interested in finding a fair price for kidneys. It does not want compensation to unduly influence the decision to donate an organ, nor to encourage organ trading. The problem with this position is that it doesn’t make sense. Given an enforced compensation of zero, a certain number of people are going to enter the market for kidneys for other reasons, generally in private transactions. The compensation in utility of giving a kidney to a friend or family member has, in the past, proven enough for some people; meanwhile, others will refuse.

The upshot of all of this is that there will be a substantial deadweight loss with regard to a perfectly competitive market, as in the case of any price ceiling with high transaction costs blocking a black-market escape hatch. The recipients will generate extra utility, of course, from their extended lifespans, and depending on the availability of kidneys on the black market currently, the compensation will likely induce additional organ donors to supply kidneys to the market. Since prices do not float freely, there will be no period in which prices are imperfectly determined, so those with an indifference point below the government-set price will derive additional producer surplus from selling their kidneys at above their minimum rate. Additionally, the effective price is slightly higher than the actual amount of compensation, because the government is providing long-term care, short-term life insurance, and priority status on organ donation lists.

The overall value can’t be determined without more information – the BioEdge article implies that the government will reimburse donors, but also states that the government will “allow” compensation. In the case of recipient payment, the utility gained will be offset by the payment, particularly if the price of a kidney is set and not allowed to vary. If the government behaves as a monopsony and acts as a broker for kidneys, then that cost will be spread across the taxpayers of Singapore, in which case the analysis is slightly more complicated.

As Caplan said, though, if I were on dialysis, I’d be booking my ticket right now.

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