Fairness and externalities

Abstract

We study equitable allocation of indivisible goods and money among agents with other-regarding preferences. First, we argue that Foley's (1967) equity test, i.e., the requirement that no agent prefers the allocation obtained by swapping her consumption with another agent, is suitable for our environment. Then we establish the existence of allocations passing this test for a general domain of preferences that accommodates prominent other-regarding preferences. Our results are relevant for equitable allocation among inequity-averse agents and in a domain with linear externalities that we introduce. Finally, we present conditions guaranteeing that these allocations are efficient.