Stability and Segregation in Group Formation

This paper presents a model of group formation based on the assumption that individuals prefer to associate with people similar to them. It is shown that, in general, if the number of groups that can be formed is bounded, then a stable partition of the society into groups may not exist. (A partition is defined as stable if none of the individuals would prefer be in a different group than the one he is in.) However, if individuals' characteristics are one-dimensional, then a stable partition always exists. We give sufficient conditions for stable partitions to be segregating (in the sense that, for example, low-characteristic individuals are in one group and high-characteristic ones are in another) and Pareto efficient. In addition, we propose a dynamic model of individual myopic behavior describing the evolution of group formation to an eventual stable, segregating, and Pareto efficient partition. Journal of Economic Literature Classification Numbers: C72, H41.     

The demand commitment bargaining and snowballing cooperation

Summary A multi-person bargaining model based on sequential demands is studied for coalitional games with increasing returns to scale for cooperation. We show that for such games the (subgame perfect) equilibrium behavior leads to a payoff distribution which approaches the Shapley value as the money unit approaches 0. Subgame consistency and strategic equilibria are the main tools used in the analysis. The model is then applied to study a problem of public good consumption.I wish to thank Reinhard Selten, who introduced me with the topic of non-cooperative coalition bargaining, for many constructive discussions. Al Roth's warm hospitality during the academic year 1990–1991, as well as many useful remarks are also gratefully acknowledged. Helpful discussions with Dieter Balkenborg, Tatsuro Ichiishi, Richard Mclean, Benny Moldovanu, Daniel Seidmann Avner Shaked are gratefully acknowledged as well. Part of this research was also supported by the Deutscheforschungsgemeinschaft SFB 303 at the University of Bonn.     

The Borda rule,Condorcet consistency and Condorcet stability

Summary. The Borda rule is known to be the least vulnerable scoring rule to Condorcet inconsistency, Saari (2000). Such inconsistency occurs when the Condorcet winner (the alternative which is preferred to any other alternative by a simple majority) is not selected by the Borda rule. This note exposes the relationship between the Borda rule and the Condorcet q-majority principle as well as the Condorcet q-majority voting rule. The main result establishes that the Borda rule is Condorcet q-majority consistent when where k is the number of alternatives. The second result establishes that is the minimal degree of majority decisiveness corresponding to the Borda rule under sincere voting. The same majority is required to ensure decisiveness under the Borda rule and to ensure that a q-rule (the generalized q-majority Condorcet rule) is a voting rule. Received: April 8, 2002; revised version: July 17, 2002 Correspondence to:S. Nitzan     

On large games with bounded essential coalition sizes

We consider games in characteristic function form where the worth of a group of players depends on the numbers of players of each of a finite number of types in the group. The games have bounded essential coalition sizes: all gains to cooperation can be achieved by coalitions bounded in absolute size (although larger coalitions are permitted they cannot realize larger per-capita gains). We show that the utility function of the corresponding "limit" market, introduced in Wooders (1988, 1994a) , is piecewise linear. The piecewise linearity is used to show that for almost all limiting ratios of percentages of player-types, as the games increase in size (numbers of players), asymptotically the games have cores containing only one payoff, and this payoff is symmetric (treats players of the same type identically). We use this result to show that for almost all limiting ratios of percentages of player-types, Shapley values of sequences of growing games converge to the unique limiting payoff.     

Toward global checks and balances

The rapid growth and importance of intergovernmental coordination in the regulation of markets, transportation and communication, the environment, and national security poses numerous challenges for democratic accountability within participating states. Direct public participation in the intergovernmental regulatory bodies is generally modest or absent. Information regarding their deliberations is limited. And the multiple oversight mechanisms and supervisory processes that exist at the domestic level of developed democracies that can scrutinize intergovernmental regulatory decisions tend to be lacking. This lack of accountability raises legitimacy concerns, the most prominent of which is the fear executive branch officials will delegate controversial policy decisions to intergovernmental bodies in order to escape democratic deliberation. In this paper we survey the ways that different review venues (other international institutions and national courts) are attempting to cope with these accountability related issues: we argue that national courts may prove to be the most effective venue for promoting democratic accountability. This is not because they are more reliably representative of their domestic constituency or possess a more cosmopolitan perspective than the bodies whose decisions they are reviewing. Rather their relative advantage lies in: (1) the increasing acceptance on the part of domestic courts that inter-judicial coordination is a prerequisite for their continued ability to fulfill their judicial review function; and (2) the visibility that the decisions of these courts possess. Acting together these two forces have the potential to foster greater transparency and public deliberation than most rival venues.     

Property appraisal in high-rises: A cooperative game theory approach

The construction of the higher stories in a building is utterly contingent upon the construction of the lower ones, while the construction of lower stories does not require the construction of the higher ones. This rationale underlies our adoption of a cooperative game theory methodology for examining the value of units based on the cost approach of land appraisal. Particularly, we propose the Shapley value solution to examine the allocation of the land and construction cost among the stories of the building. We explore the allocation mechanism and derive several closed-form properties by which the value pattern of stories in a building is rationalized. The proposed cost allocation may, among other things, generate values when comparable market prices are unobservable (consistent with the cost approach); may be used by courts in order to compute compensations in cases of disputes regarding expansions and redevelopments of existing structures among co-owners; and may determine the rent cost allocation in an organization with several profit centers located on different floors of a building.     

Ownership coordination in a channel: Incentives,returns, and negotiations

In many industries firms have to make quantity decisions before knowing the exact state of demand. In such cases, channel members have to decide which firm will own the units until demand uncertainty is resolved. The decision about who should retain ownership depends on the balance of benefit and risk to each member. Ownership, after all, is costly. Whichever member owns the units accepts the risk of loss if more units are produced than can be sold. But ownership also grants firms the flexibility to respond to demand once it becomes known by adjusting price. In this study, we analyze ownership decisions in distribution channels and how those decisions are affected by demand uncertainty. We model demand based on micro-modeling of consumer utility functions and capture demand uncertainty related to market size and price sensitivity. This study shows that as long as the degree of uncertainty about market size is intermediate, the retailer and the manufacturer both benefit when the manufacturer maintains ownership of the units. But when there is substantial uncertainty about market size, the retailer and the channel are better off if the retailer takes ownership but the manufacturer still prefers to maintain ownership. Thus, there is potential for channel conflict regarding ownership under high levels of uncertainty. We show that, using product returns, the manufacturer can achieve the same outcome under retailer ownership as under manufacturer ownership. This provides an additional new rationale for the prevalence of product returns. The first-best outcome (from the perspective of total channel profit), however, is under retailer ownership without product returns when uncertainty is high (i.e., product returns reduce the total channel profit). Negotiations between the manufacturer and the retailer can lead to the first-best outcome but only under quite restrictive constraints that include direct side payments by the retailer to the manufacturer and the retailer being pessimistic about its outside option (when an agreement cannot be reached) during the negotiation.     

Corruption, institutions and trade

The economics literature describes various factors that affect trade between countries, which, in addition to the standard economic and geographic factors, also include cultural, ethnic and historical factors. The present study is apparently one of only a few attempts in the literature to examine directly the effects of corruption on trade and the first attempt to examine trade over time in a specific country whose level of corruption changed significantly. Israel was chosen as the subject of the study mainly because of the fact that, according to international indexes, the country’s status as a civil society has declined significantly over the past decade. According to the corruption index of Transparency International, Israel was ranked 33rd in the world, at the end of the sample period in 2008, having fallen from 14th in 1995. The results of the research can serve as the basis for comparison to similar studies of other Western countries. The study’s conclusions support the hypothesis that the effect of corruption on trade of any given country is significant, stable and negative.     

Does IFRS 10 on Consolidated Financial Statements Abandon Accepted Economic Principles?

The 2007 global financial crisis revealed a deficiency in the financial reporting of off‐balance‐sheet vehicles. To better reflect risks associated with such items, International Financial Reporting Standard (IFRS) 10 provided new principles for determining an investor's control of an investee for the purpose of preparing consolidated financial statements. We show that an applicative example appearing under the new guidelines contradicts the conclusion drawn from widely accepted power indices: the Shapley‐Shubik value and the Banzhaf index. Our study adds to the literature aiming to incorporate methodological economic thought into accounting principles.     

Transparency and incentives among peers

This article studies the effect of transparency among peers on the principal's cost of providing incentives. Using directed graphs to represent peer information, we show that under complementarity the cost of providing incentives is decreasing with the level of transparency within the organization. We also investigate the role of the architecture of the information in boosting incentives. In arguing that substitution impedes the benefits of transparency, we will compare function‐based teams with process‐based teams, showing that the latter are more effective in providing incentives.