Evaluating the Efficiency of Regulation in Matching Markets with Distributional Disparities

TL;DR

This paper compares cap-based regulations and subsidies in matching markets, showing that targeted subsidies can improve efficiency and social welfare over traditional cap-based policies, based on a new framework and empirical data from Japan.

Contribution

It introduces a framework incorporating regional constraints into matching models and demonstrates that subsidies outperform caps in efficiency and welfare through empirical analysis.

Findings

Cap-based policies cause significant efficiency losses.

Targeted subsidies can match distributional goals with higher welfare.

Empirical data from Japan supports subsidy effectiveness.

Abstract

Cap-based regulations are widely used to address distributional disparities in matching markets, but their efficiency relative to alternative instruments such as subsidies remains poorly understood. This paper develops a framework for evaluating policy interventions by incorporating regional constraints into a transferable utility matching model. We show that a policymaker with aggregate-level match data can implement a taxation policy that maximizes social welfare and outperforms any cap-based policy. Using newly collected data from the Japan Residency Matching Program, we estimate participant preferences and simulate counterfactual match outcomes under both cap-based and subsidy-based policies. The results reveal that the status quo cap-based regulation generates substantial efficiency losses, whereas small, targeted subsidies can achieve similar distributional goals with significantly higher social welfare.