Fuhito Kojima, Ning Sun, Ning Neil Yu
In markets for indivisible resources such as workers and objects, subsidy and taxation for an agent may depend on the set of acquired resources and prices. This paper investigates how such transfer policies interfere with the substitutes condition, which is critical for market equilibrium existence and auction mechanism performance among other important issues. For environments where the condition holds in the absence of policy intervention, we investigate which transfer policies preserve the substitutes condition in various economically meaningful settings, establishing a series of characterization theorems. For environments where the condition may fail without policy intervention, we examine how to use transfer policies to reestablish it, finding exactly when transfer policies based on scales are effective for that purpose. These results serve to inform policymakers, market designers, and market participants of how transfer policies may impact markets, so more informed decisions can be made.
*Published in The Review of Economic Studies