  We examine the problem of assigning plots of land to prospective buyers who
prefer living next to their friends. They care not only about the plot they
receive, but also about their neighbors. This externality results in a highly
non-trivial problem structure, as both friendship and land value play a role in
determining agent behavior. We examine mechanisms that guarantee truthful
reporting of both land values and friendships. We propose variants of random
serial dictatorship (RSD) that can offer both truthfulness and welfare
guarantees. Interestingly, our social welfare guarantees are parameterized by
the value of friendship: if these values are low, enforcing truthful behavior
results in poor welfare guarantees and imposes significant constraints on
agents' choices; if they are high, we achieve good approximation to the optimal
social welfare.
