Policy Targeting with Market Equilibrium
Abstract
This paper develops a framework for individualized treatment allocation when interventions shift equilibrium prices and generate spillovers across treated and untreated units. The planner chooses which units receive a subsidy while allowing equilibrium prices to adjust endogenously. We show that the resulting welfare function is supermodular under broad and interpretable conditions, implying complementarity across treatment assignments and enabling exact polynomial-time optimization. This structure clarifies how equilibrium spillovers shape the trade-off between universal and targeted distribution and makes the planner's problem computationally tractable despite interactions across units. We characterize when universal or targeted subsidies are optimal and show how market conditions and heterogeneity shape the optimal allocation. We further establish statistical guarantees for plug-in allocation under estimation uncertainty in demand and supply. Finally, we illustrate the framework in a coupon allocation problem calibrated with household expenditure data from the Philippines.