Ulric B. and Evelyn L. Bray Social Sciences Seminar
Abstract: We propose a market solution to the problem of resource allocation subject to constraints, such as considerations of diversity or geographical distribution. Constraints give rise to pecuniary externalities, which are internalized via prices. Agents pay to the extent that their purchases affect the value (at equilibrium prices) of the relevant constraints. The result is a constrained-efficient market equilibrium outcome. The outcome is fair whenever the constraints do not single out individual agents, which happens, for example with geographical distribution constraints. In economies with endowments, moreover, we can address participation constraints. Our equilibrium outcomes are then constrained efficient and approximately individually rational.
Written with Antonio Miralles and Jun Zhang.