Journal Article

Coalition Formation with Binding Agreements

Kyle Hyndman and Debraj Ray

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 4, pages 1125-1147
Published in print October 2007 | ISSN: 0034-6527
Published online October 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00450.x
Coalition Formation with Binding Agreements

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  • Game Theory and Bargaining Theory
  • Analysis of Collective Decision-making

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We study coalition formation in “real time”, a situation in which coalition formation is intertwined with the ongoing receipt of pay-offs. Agreements are assumed to be permanently binding: They can only be altered with the full consent of existing signatories. For characteristic function games we prove that equilibrium processes—whether or not these are history dependent—must converge to efficient absorbing states. For three-player games with externalities each player has enough veto power that a general efficiency result can be established. However, there exist four-player games in which all Markov equilibria are inefficient from every initial condition, despite the ability to write permanently binding agreements.

Keywords: C71; D74

Journal Article.  14013 words.  Illustrated.

Subjects: Game Theory and Bargaining Theory ; Analysis of Collective Decision-making

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