What Pareto-Efficiency Adjustments Cannot Fix

Abstract

The Deferred Acceptance (DA) algorithm is stable and strategy-proof, but can produce outcomes that are Pareto-inefficient for students, and thus several alternative mechanisms have been proposed to correct this inefficiency. However, we show that these mechanisms cannot correct DA's rank-inefficiency and inequality, because these shortcomings can arise even in cases where DA is Pareto-efficient. We also examine students' segregation in settings with advantaged and marginalized students. We prove that the demographic composition of every school is perfectly preserved under any Pareto-efficient mechanism that dominates DA, and consequently fully segregated schools under DA maintain their extreme homogeneity.