Spheres of Exchange: Restricted Convertibility as Inequality-Aware Market Design

Spheres of exchange (SOEs) are institutional arrangements in which goods trade freely within distinct spheres but face formal restrictions on cross-sphere exchange. Most commonly, this restricted convertibility separates subsistence goods from luxury goods. While SOEs are extensively documented by historians and ethnographers, their welfare properties remain largely unexamined in formal economic models. This paper develops a general equilibrium framework showing that SOEs can be understood as a form of inequality-aware market design. By restricting the convertibility of luxury wealth into essential goods, SOEs improve access to subsistence goods for poorer agents. We show when SOEs dominate commodity taxation and quantity rationing on utilitarian grounds, and that combining SOEs with commodity taxation can yield higher welfare than either instrument alone.