Bidding and sequential coalition formation with externalities |
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Authors: | Licun Xue Lingling Zhang |
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Institution: | 1. Department of Economics, McGill University, 855 Sherbrooke Street West, Montreal, QC, H3A 2T7, Canada 2. Economic Analysis Directorate, Environment Canada, 10 Wellington Street, Gatineau, QC, K1A 0H3, Canada
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Abstract: | We study coalition formation games with externalities where each agent’s payoff depends on the entire partition. As in Bloch
(Games Econ Behav 14:90–123, 1996) and Ray and Vohra (Games Econ Behav 26:268–336, 1999), we assume that coalitions form sequentially and agreements are irreversible. Instead of a fixed order protocol, we use
a “bidding mechanism” (see Pérez-Castrillo and Wettstein in Am Econ Rev 92(5):1577–1587, 2002) to determine proposals and transfers among the agents. We show that such a mechanism facilitates the attainment of efficiency;
in particular, our game admits a Markov perfect equilibrium with the property of full dynamic efficiency. In addition, the
aggregate equilibrium payoffs of our game exhibit monotonicity in time. Nevertheless, inefficient equilibria can also emerge. |
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