Abstract
We consider the school choice problem where students who live near each other may prefer to be assigned to the same school. Even this very mild form of externality means that stable matchings may not exist, and that the student-proposing deferred acceptance mechanism may yield undesirable results — it is neither stable nor strategy-proof. We modify the school-proposing deferred acceptance mechanism to improve its performance. Our setting has important differences from both matching with couples and matching with preferences over colleagues.
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