Constrained Pseudo-market Equilibrium

TL;DR

This paper introduces a pseudo-market framework for resource allocation under diverse constraints, internalizing externalities through prices to achieve fair and efficient outcomes in complex settings.

Contribution

It generalizes market equilibrium concepts to include various constraints, providing a unified approach to fair and efficient resource allocation.

Findings

Achieves constrained market equilibrium with internalized externalities

Ensures fairness when constraints are non-discriminatory

Extends to economies with endowments and participation constraints

Abstract

We propose a pseudo-market solution to resource allocation problems subject to constraints. Our treatment of constraints is general: including bihierarchical constraints due to considerations of diversity in school choice, or scheduling in course allocation; and other forms of constraints needed to model, for example, the market for roommates, and combinatorial assignment problems. Constraints give rise to pecuniary externalities, which are internalized via prices. Agents pay to the extent that their purchases affect the value of relevant constraints at equilibrium prices. The result is a constrained efficient market equilibrium outcome. The outcome is fair whenever the constraints do not single out individual agents. Our result can be extended to economies with endowments, and address participation constraints.