Pareto optimality in coalition formation

A minimal requirement on allocative efficiency in the social sciences is Pareto optimality. In this paper, we identify a close structural connection between Pareto optimality and perfection that has various algorithmic consequences for coalition formation. Based on this insight, we formulate the Preference Refinement Algorithm (PRA) which computes an individually rational and Pareto optimal outcome in hedonic coalition formation games. Our approach also leads to various results for specific classes of hedonic games. In particular, we show that computing and verifying Pareto optimal partitions in general hedonic games, anonymous games, three-cyclic games, room-roommate games and B-hedonic games is intractable while both problems are tractable for roommate games, W-hedonic games, and house allocation with existing tenants.     

Networked innovation and coalition formation: the effect of group-based social preferences

In this paper, we study the production and dissemination of public knowledge goods, such as technological knowledge, generated by a network of voluntarily cooperating innovators. We develop a private-collective model of public knowledge production in networked innovation systems, where group-based social preferences have an impact on the coalition formation of developers. Our model builds on the large empirical literature on voluntary production of pooled public knowledge goods, including source code in communities of software developers or data provided to open access data repositories. Our analysis shows under which conditions social preferences, such as ‘group belonging’ or ‘peer approval’, influence the stable coalition size, as such rationalising several stylized facts emerging from large-scale surveys of open-source software developers, previously unaccounted for. Furthermore, heterogeneity of social preferences is added to the model to study the formation of stable but mixed coalitions.     

Unique stability in simple coalition formation games

We investigate the uniqueness of stable coalition structures in a simple coalition formation model, for which specific coalition formation games, such as the marriage and roommate models, are special cases that are obtained by restricting the coalitions that may form. The main result is a characterization of collections of permissible coalitions which ensure that there is a unique stable coalition structure in the corresponding coalition formation model. In particular, we show that only single-lapping coalition formation models have a unique stable coalition structure for each preference profile, where single-lapping means that two coalitions cannot have more than one member in common, and coalitions do not form cycles. We also give another characterization using a graph representation, explore the implications of our results for matching models, and examine the existence of strategyproof coalition formation rules.     

Efficiency in coalition games with externalities

A natural extension of superadditivity is not sufficient to imply that the grand coalition is efficient when externalities are present. We provide a condition, analogous to convexity, that is sufficient for the grand coalition to be efficient and show that this also implies that the (appropriately defined) core is nonempty. Moreover, we propose a mechanism which implements the most efficient partition for all coalition formation games and characterizes the resulting payoff division.     

An experimental analysis of cooperation and productivity in the trust game

In the standard trust game the surplus is increased by the risk taking first mover while cooperation by the second mover is a one-to-one transfer. This paper reports results from experiments in which the reverse holds; the first mover’s risky trust is not productive and the second mover’s cooperation is productive. This subtle difference significantly lowers the likelihood of trust but increases the likelihood of cooperation conditional on trust. Evidence is presented that the change in trust is consistent with first movers failing to anticipate the later result. Drawing upon the analogy that the trust game represents a model of exchange, the results suggest that markets should be organized so that the buyer moves first and not the seller as in the original trust game.

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Inequity aversion and trustees' reciprocity in the trust game

The introduction of inequity concerns into the Trust Game gives rise to complementary concepts of conditional trustworthiness and unconditional untrustworthiness. When the inequity concern is not accounted for, unconditional untrustworthiness is overestimated. The high proportion of trustees adopting the equal division behavioural norm suggests that an unequal distribution of show-up fees may deter trustors from placing trust, and may eventually reduce the incentive to cooperate for both players. It also follows that increases in income inequality can explain declines in self-reported trust in high-income countries.     

Social norms and gift behavior: Theory and evidence from Romania

In many developing and transitional countries with limited public income redistribution, inter-household transfers in general, and gifts in particular, are sizable and very important. We use unique Romanian survey data that enables us to isolate pure gifts from other private transfers. We explicitly focus on the importance of community-wide social norms, and find that they indeed play a major role for both the occurrence and the values of gifts. More exactly, our results suggest that the overall predominant gift motive among Romanian households is a norm of reciprocity. Moreover, this norm seems to be dominating for gifts to middle- and high-income households. Even though poor households receive to the same extent, norms of both impure altruism and reciprocity tend to be important. Hence, although the poor may not reciprocate gifts to the same extent as the rich, they still receive, since there is a social norm to give, especially to the poor.     

The effects of tariffs on coalition formation in a dynamic global warming game

The prospects for cooperation on climate protection beyond 2012 are currently uncertain. Thus policy instruments which foster participation in International Environmental Agreements (IEA) are in demand. Among the instruments under discussion are trade sanctions. Multi-region optimal growth models are a state of the art tool for integrated assessment, but introducing trade sanctions distorts the competitive equilibrium, making it difficult to compute numerically. We introduce trade and trade sanctions into a model of coalition stability to assess the potential of trade sanctions to support an IEA. Trade is modeled by having all countries produce a generic output good, but adopting national product differentiation (Armington assumption). Coalitions are free to impose tariffs on imports from non-cooperating countries. We solve the model numerically using a refined version of Negishi's [Negishi, T., 1960. Welfare economics and existence of an equilibrium for a competitive economy. Metroeconomica 12, 92–97] basic algorithm. We then apply the model to analyze the influence of tariffs on international cooperation. The model suggests that there is indeed a significant potential to raise participation through trade sanctions, even when goods from different countries are nearly perfect substitutes. Furthermore we investigate the effect of trade sanctions on global welfare, environmental effectiveness, and the credibility of the tariff mechanism.     

On the formation of interaction networks in social coordination games

There are many situations where two interacting individuals can benefit from coordinating their actions. We examine the endogenous choice of partners in such social coordination games and the implications for resulting play. We model the interaction pattern as a network where individuals periodically have the discretion to add or sever links to other players. With such endogenous interaction patterns we see multiple stochastically stable states of play, including some that involve play of equilibria in the coordination game that are neither efficient nor risk-dominant. Thus the endogenous network structure not only has implications for the interaction pattern that emerges, but it also has a significant impact on the play in the coordination game relative to what would arise if the same interaction network were exogenous.     

On the evaluation of power in parliaments and government formation

This paper is devoted to the study of power in Parliaments. We explain how the power of coalitions can be computed after elections. We add to the existing literature by using this analysis to predict what government may emerge from these elections.      

Trust and reciprocity in inter-individual versus inter-group interactions: The effects of social influence, group dynamics, and perspective biases

Using an experimental trust game, I examine whether the perspectives and behavior of group representatives and consensus groups differ from those of the same individuals in an analogous inter-individual situation. A primary goal of this research is to extend past work on trust and reciprocity by examining the impact of the social contexts within which social interactions are characteristically embedded. Specifically, this research concerns whether norms and dynamics of trust and reciprocity differ in the contexts of inter-individual and inter-group interactions. First, I examine whether dynamics of trust and reciprocity differ in various inter-group interactions where inter-group decisions are operationalized as 1) autonomous group representatives, i.e., individuals who are given the responsibility of unilaterally making a decision on behalf of a three-person group engaging with a group representative of another such group; and 2) consensus groups, i.e., group members making a consensus trust or reciprocity decision for their groups via a collective process with another such group. Results of these studies show that 1) people trust less and reciprocate less when responsible for a group or organizational decision as autonomous group representatives; 2) consensus groups do not differ from individuals in their level of trust but show dramatically less reciprocity. The group consensus mechanism in fact produced by far the lowest reciprocity level, significantly lower than that exhibited by either individuals or autonomous group representatives. Thus, inter-group trust and reciprocity dynamics are not readily inferable from their inter-individual counterparts. Moreover, an important implication is emerging here: the extent and direction of the discrepancy between individual and group choices in regard to trust and reciprocity levels and possibly other social preferences in general may depend importantly on the precise details of the group decision-making mechanism, for example whether decisions are made consensually, by majority vote, or by a group leader or representative. In addition to examining the level of trust and reciprocity that occur in these various situations, I also studied, using both behavioral and questionnaire data, the roles of self-interest, social influence, and group dynamics in trust and reciprocity perceptions and behavior. The results showed that there exist discrepancies between behavioral forecasts and the actual behavior, and that trusting behavior is driven strongly by expectation of level of reciprocation, while reciprocating behavior is driven strongly by the difference between trust expectation and actual trust received.     

Contractual preferences and moral biases: social identity and procedural fairness in the exclusion game experiment

Many people may suffer from moral biases when making allocation decisions having consequences to others. This means that some factors hinder people from finding, or constructing, their true social preferences in those situations. As a counterforce to this, numerous devices of moral priming have evolved—such as parenting, formal education as well as various formal and informal contracting procedures. This paper focuses on the influences of social identity and the perceived fairness of contracting procedures on subjects’ behaviour in situations of allocation decisions. The analysis of experimental data suggest, first, that males are less likely than females to engage in other-regarding behaviour in a pre-agreement situation where two active players divide an endowment among themselves and a third, passive, player. However, this difference disappeared after the joint contract of the rule of dividing the endowment was made. Second, it was found that students of economics are less likely than other students to behave in an other-regarding way before the contract; this difference remained also in decisions after the contract was made. Finally, both a random selection mechanism and a majority voting mechanism were rated fair by the majority of the subjects. However, the data suggests that fairness ratings are positively associated with compliant behavior only in the case of the majority voting mechanism.     

Moral self-licencing and social dilemmas: an experimental analysis from a taking game in Madagascar

This article explores whether previous good deeds may license antisocial behaviour, such as appropriating a social surplus for private benefits, in a developing country context, namely Madagascar. We design a two-step framed experiment, with one control treatment (a neutral task) and three test treatments (tasks enabling subjects to earn moral credits in three different ways), followed by a taking game in which subjects are given the opportunity to take an amount from a fund allocated to their University. On average, we find that participants in the three licencing conditions appropriate more than those in the control group and that further differences emerge according to the way the moral credits have been earned.     

A stress test of fairness measures in models of social utility

Summary. Current social utility models posit fairness as a motive for certain types of strategic behavior. The models differ, however, with respect to how fairness is measured. Distribution models measure fairness in terms of relative payoff comparisons. Reciprocal-kindness models measure fairness in terms of gifts given and gifts received. Reference points play an important role in both measures, but the reference points in reciprocal-kindness models are conditioned on the actions available to players, whereas those in distributive models are not. Data from an ultimatum game experiment that stress tests the kindness measure is consistent with the distributive measure. Data from an experiment that stress tests the distributive measure is inconsistent with the distributive measure, but moves in the direction opposite that implied by the kindness measure. A measure that combines relative payoff comparisons with a reference point conditioned on feasible actions provides a first approximation to our data.Received: 12 August 2002, Revised: 27 November 2003, JEL Classification Numbers: C78, C91, D63. Correspondence to: Axel OckenfelsBolton gratefully acknowledges the support of the National Science Foundation. Ockenfels thanks Alvin Roth and the Harvard Business School for their generous hospitality, and the Deutsche Forschungsgemeinschaft for their support through the Emmy Noether-program. Both authors gratefully acknowledge the hospitality of the Making Choices project at the Center for Interdisciplinary Research, University of Bielefeld during the summer of 2000. We also thank an anonymous referee and seminar participants in Bielefeld, Boston, Columbus, Harvard, and Jena for helpful comments.     

Economic freedom and social capital: pooled mean group evidence

This article uses annual US-state-level data from 1986 to 2004 and pooled-mean group estimation based on Pesaran et al. (1999) to examine whether economic freedom influences social capital. We find economic freedom has a negative effect on our social capital measure. This result is driven by the labour market component of freedom which is indicative of the relationship between labour market freedom and Olson-type group social capital.     

Mainstream economics, heterodoxy and academic exclusion: a review essay

Does the mainstream of economic thinking and analysis tend systematically to exclude ideas and approaches that could enrich the field, and, as a consequence, have important questions and issues been shunted aside for nonobjective reasons? Two recent volumes by heterodox economists that address these questions are Geoffrey Hodgson's How Economics Forgot History: The Problem of Historical Specificity in Social Science, and Steve Keen's Debunking Economics: The Naked Emperor of the Social Sciences. I evaluate their claims of academic exclusion and assess the current state of (selective) pluralism within mainstream economics.     

Intrinsic and instrumental reciprocity: An experimental study

In the context of an indefinitely repeated veto game, we devise an experiment to distinguish between alternative explanations of generous behavior (accepting negative payoffs): altruism, intrinsic backward-looking reciprocity, and instrumental forward-looking reciprocity. Our results are broadly consistent with the hypothesis that observed sacrifices are motivated by equilibrium selfish, forward-looking reciprocal behavior although we find a more subtle way in which past kindness affects behavior.     

Common fate,game harmony and contributions to public goods: experimental evidence

We experimentally study the effects of common fate on voluntary contributions to linear public goods. In each period, earnings are assigned to subjects according to the outcome of a lottery. In ‘common fate’, ‘independent fate’ and ‘rival fate’ treatments, the lottery outcomes of group members are (respectively) positively correlated, stochastically independent and negatively correlated. We observe the highest contributions and strongest reciprocity under common fate. Contrary to the game harmony hypothesis, contributions are not lower under rival fate than under independent fate. Surprisingly, under rival fate, having won the lottery in one period induces higher contributions in the next period.     

Leading-by-example and signaling in voluntary contribution games: an experimental study

We report experimental results on the effect of leadership in a voluntary contribution game. Consistent with recent theories we find that leading-by-example increases contributions and earnings in an environment where a leader has private information about the returns from contributing (Hermalin in Am Econ Rev 88:1188–1206, 1998; Vesterlund in J Public Econ 87:627–657, 2003). In contrast the ability to lead-by-example has no effect on total contributions and earnings when such returns are commonly known. In our environment the success of leadership therefore appears to be driven by signaling rather than by nonpecuniary factors such as reciprocity. This paper was started while the authors were visiting the Harvard Business School during the fall of 2000. We are grateful for their hospitality and financial support. Vesterlund acknowledges support from the National Science Foundation and Potters from the Royal Netherlands’ Academy of Arts and Sciences. We thank Henrik Orzen for assistance in conducting the experiment. We also thank David Cooper and an anonymous referee who helped us improve the paper. Finally we thank Chris Anderson, Jim Andreoni, John Duffy, Simon Gaechter, Ernan Haruvy, Muriel Niederle, Jack Ochs, Elke Renner, Al Roth, participants at ESA-meetings (Barcelona, 2001), the Leadership and Social Interactions Workshop (Lyon, 2003), SITE (Stanford, 2004) and seminar participants at Alabama, CMU, Duke, Keele, Maryland, Nottingham, NYU, Pittsburgh, OSU, and York for valuable comments.