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Core and Top Trading Cycles in a Market with Indivisible Goods and Externalities

In this paper, we incorporate externalities into Shapley-Scarf housing markets. Agents' preferences are defined over allocations rather than houses, and we focus on preferences that are egocentric in the sense that agents primarily care about their own allotments. When preferences are egocentric, we can apply the top trading cycles (TTC) algorithm using the associated preferences over houses. We establish that the allocation generated by the TTC algorithm is a stable allocation in the core, and we present a further preference restriction under which it is the unique such allocation. We also investigate the properties of the TTC algorithm as a mechanism. Our results extend the existing results on the TTC algorithm to the case of egocentric preferences, and they suggest that the TTC algorithm is useful and has desirable properties even in the presence of externalities.