Endogenous coalition formation in contests

This paper analyzes coalition formation in a model of contests with linear costs. Agents first form groups and then compete by investing resources. Coalitions fight for a prize that is assumed to be subject to rivalry, so its value is non-increasing in the size of the group that obtains it. This formulation encompasses as particular cases some models proposed in the rent-seeking literature. We show that the formation of groups generates positive spillovers and analyze two classes of games of coalition formation. A contest among individual agents is the only stable outcome when individual defections leave the rest of the group intact. More concentrated coalition structures, including the grand coalition, are stable when groups collapse after a defection, provided that rivalry is not too strong. Results in a sequential game of coalition formation suggest that there exists a non-monotonic relationship between the level of underlying rivalry and the level of social conflict.

“If men were supplied with every thing in the same abundance, justice and injustice would be equally unknown among mankind.” David Hume (1740), A Treatise of Human Nature

I thank Luis Corchón, Joan Esteban, Michelle Garfinkel and József Sákovics for their comments and suggestions on the paper.     

Habit formation and wage determination

We analyse the implications of habit formation relating to wages in a multiperiod efficiency‐wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same consequences, because wage adjustments counteract the initial level impact. The firm's response additionally depends on the wage dependency of dismissal costs, because such costs make an increasing wage profile over time more attractive and mitigate the effects of greater intensity of habit formation. We further show that short‐lived productivity shocks have long‐lasting wage and employment consequences. Moreover, habit concerns by firm owners reduce wages.     

Strategy formation as layered discussion

This paper seeks to elucidate the day-to-day activities comprising the strategy process at the senior management level as part of a layered discussion. The recent interest in micro-strategy has stimulated a re-examination of data gathered during an eight-month stay with the senior management group of one of the larger construction companies in the Netherlands in 1990 and 1991. It emerged that the intended strategy was rarely debated deliberately or openly. If strategy content was ever discussed, it was usually in an implicit manner while dealing with other subjects, where the outcome appeared to have a bearing on the strategic direction of the firm.     

Internal habits formation and optimality

In a very influential model with internal habits, Carroll et al., (2017, 2000), establish that an increase in economic growth may cause a positive change in savings. The optimality of this result, and of many other contributions using a similar framework, has been questioned by some authors who have observed that the parametrization used in these models always implies a utility function not jointly concave in consumption and habits. In this paper, we revisit the optimality issue and, using advanced techniques in Dynamic Programming, we answer the following long-standing open questions: (i) Is the solution found in Carroll et al., (2017, 2000) optimal? (ii) Is it also unique or do other optimal solutions exist?     

Typology formation across socio-economic indicators

Some decisions in planning and policy formation require the comparison of one region or country with another. If the entities being compared are known and have been demonstrated to be either similar or different, then valid comparisons can be made. Unfortunately, many comparisons are made on an ad hoc and often improper basis. The paper describes a method of typology formation which requires the modification and the use of the Euclidean distance measure calculated between countries over a series of social indicators. The potential usefulness of the method is demonstrated by reference to an example using indicators of educational system provision.     

Network formation with sequential demands

This paper introduces a non-cooperative game-theoretic model of sequential network formation, in which players propose links and demand payoffs. Payoff division is therefore endogenous. We show that if the value of networks satisfies size monotonicity, then each and every equilibrium network is efficient. The result holds not only when players make absolute participation demands, but also when they are allowed to make link-specific demands.     

Club theory and household formation

The relationship between our general equilibrium model with multi-member households and club models with multiple private goods is investigated. The main distinction in the definitions consists in the equilibrium concepts. As a rule, competitive equilibria among households where no group of consumers can benefit from forming a new household and valuation equilibria prove equivalent in the absence of consumption externalities, but not in their presence.     

Price formation in commodity markets

This paper develops a theory-consistent market model for storable commodities and illustrates its characterization of the data-generating process for a set of major traded commodities. The dynamics of the system incorporate recent advances in modelling techniques. Cointegrated variables in the demand functions are represented by the error correction mechanism (ECM), and expected prices in the stock demand relationship are generated by a rational expectations process. The outside-sample performance of the model is tested against the pure time-series model used to formulate expected prices, and is shown to have a smaller mean square error than that of the time-series model. Thus the model provides comparatively efficient forecasts and, unlike models constructed in their reduced form, permits consideration of key behavioural relationships in commodity markets.     

Party loyalty as habit formation

In most democracies, at least two out of any three individuals vote for the same party in sequential elections. This paper presents a model in which vote‐persistence is partly due to the dependence of the utility on the previous voting decision. This dependence is termed ‘habit formation’. The model and its implications are supported by individual‐level panel data on the presidential elections in the USA in 1972 and 1976. For example, it is found that the voting probability is a function of the lagged choice variable, even when the endogeneity of the lagged variable is accounted for, and that the tendency to vote for different parties in sequential elections decreased with the age of the voter. Furthermore, using structural estimation the effect of habit is estimated, while allowing unobserved differences among respondents. The structural habit parameter implies that the effect of previous votes on the current decision is quite strong. The habit model fits the data better than the traditional ‘party identification’ model. Copyright © 2003 John Wiley & Sons, Ltd.     

Team formation with complementary skills

One explanation for the prevalence of self‐managed work teams is that they enable workers with complementary skills to specialize in the tasks they do best, a benefit that may be enhanced if workers can sort themselves into teams. To assess this explanation, we design a real‐effort experiment to study the endogenous formation of teams, and its effect on productivity, when specialization either is or is not feasible. We find a strong positive interaction between endogenous team formation and the ability to specialize, indicating that endogenous team formation is a particularly effective mechanism for promoting team output in production environments that enable the exploitation of skill complementarities.     

The endogenous formation of cartels

We discuss large but finite linear market games which are represented as minima of finitely many measures. These games describe markets in which the agents decompose into finitely many disjoint groups each of which holds a corner of the market. Most solution concepts like the core, the Shapley value, or the Walrasian equilibrium tend to favor the short side of such market excessively. That is, in the replicated limit or in the continuum version, the short side is awarded all the possible profits even though cooperation within the grand coalition is required. We show that vNM-Stable Sets differ markedly. For large but finite player sets we exhibit vNM solutions that assign wealth to the long side of the market. It turns out that the shape of the generic vNM-Stable Set suggests cartelization of the market.Received: 29 March 2000, Accepted: 26 October 2001, JEL Classification: C71, D70     

The industrial relations of skills formation

Central to human resource management is the question of employee skills and their effective utilization, through such arrangements as competency-based training, performance appraisal and assessment. In this context, collective issues come to the fore: the formulation of skills-based work and pay systems, the mechanisms and procedures governing workers' allocation to and progression through skills-based job classification systems, the tracing out of career paths and the conduct of skills audits and training programmes. These issues of necessity are largely being resolved at the enterprise level They are complemented by broader questions to do with skills standardization, accreditation and portability of qualifications, which can only be resolved at the trans-enterprise level. Because all these issues have a collective character, they provide an opportunity to extend the traditional agenda of industrial relations, at both enterprise and national and sectoral level. In this paper, the expanded industrial relations agenda is linked with the emergence of new production systems based on high quality, high value-added production where skills formation and effective utilization of skills become a competitive necessity.     

Multilateral negotiations and formation of coalitions

This paper analyses properties of games modeling multilateral negotiations leading to the formation of coalitions in an environment with widespread externalities. The payoff generated by each coalition is determined by an exogenous partition function (the parameter space). We show that in almost all games, except in a set of measure zero of the parameter space, the Markov perfect equilibrium value of coalitions and the state transition probability that describe the path of coalition formation is locally unique and stable. Therefore, comparative statics analysis are well-defined and can be performed using standard calculus tools. Global uniqueness does not hold in general, but the number of equilibria is finite and odd. In addition, a sufficient condition for global uniqueness is derived, and using this sufficient condition we show that there is a globally unique equilibrium in three-player superadditive games.     

Experimental evidence on inflation expectation formation

Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics. Using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40% of subjects. More than 20% of subjects are also best described by adaptive learning models, where they behave like econometricians and update their model estimates every period. However, rather than using a single forecasting model, switching between models describes their behavior better. Switching is more likely to occur when experimental economy is in a recession.     

Coalition formation in general NTU games

A general nontransferable utility (NTU) game is interpreted as a collection of pure bargaining games that can be played by individual coalitions. The threatpoints or claims points respectively, in these pure bargaining games reflect the players' opportunities outside a given coalition. We develop a solution concept for general NTU games that is consistent in the sense that the players' outside opportunities are determined by the solution to a suitably defined reduced game. For any general NTU game the solution predicts which coalitions are formed and how the payoffs are distributed among the players.     

Political regimes: a coalition formation approach

What leads to the stability of a particular regime and what causes its demise? With the aid of formal modeling, the paper illustrates the necessary and sufficient conditions for different political regimes to exist. The game involves two factions representing the differing interests of the civil society and the armed forces of a nation. We illustrate the emergence of political regimes that includes both unconstrained and constrained democracies, both military and civilian autocracies and an alliance formed by a segment of the civil society and the military.     

Age-dependent skill formation and returns to education

This study investigates the distribution of returns to investments in cognitive and self-regulatory skills over the life cycle. In our simulation model, the distribution of returns to education results from the interaction of neurobiological and socioeconomic factors in age-dependent skill formation. A novel feature of our extension of the technology of skill formation [Cunha, F., Heckman, J.J., 2007. The technology of skill formation. The American Economic Review 97 (2), 31–47] is a life span model that integrates skill depreciation at older ages and calibrates it to German data. Our evidence quantitatively illustrates the role early childhood plays in the shaping of human capital formation, inequality and economic growth.     

A theory of coalition formation in committees

Let G = (N,W) be a strong weighted majority game and let A be a set of alternatives. Denote by L the set of linear orders on A. A social choice function F:L^N → A is a representation of G if the simple game G¹(F) associated with F equals G. A coalition S is determining in G if it satisfies the following condition. Let F be a representation of G and let R^N ? L^N. Then, if a simple majority of the members of S consider an alternative x to be their best choice, then S can ‘enforce’ x to be a Nash equilibrium payoff in the resulting non-cooperative voting game g(F,R^N). In this paper we generalize the above notion of a determining coalition to committees (i.e., proper and monotonic simple games), and give a complete characterization of the set of determining coalitions of a committee. Furthermore, we discuss our notion of a determining coalition in the light of some real-life data on formation of coalitions in town councils in Israel.