@article{53cfb8fd3bd346e2b850484afa47fc9b,

title = "Coalition formation with binding agreements",

abstract = "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.",

author = "Kyle Hyndman and Debraj Ray",

note = "Funding Information: Now suppose that there exists a state x such that ui(x) > ui(x0) for i = 2,3 and for some y such that π(y) = π1, u1(x) ≥ u1(y). In this case, the singletons clearly cannot be absorbing for δ high enough. However, with a finite number of states one can easily construct an equilibrium with a positive probability path from x0 to some efficient absorbing state for δ high enough. In particular, from x0, there is a positive probability transition to a state y ∈ π1; from y there is a probability 1 transition to some efficient state y′ which dominates y (if such a state exists; if not, y is absorbing).29 ‖ Acknowledgements. Discussions with Douglas Gale, Hideo Konishi, Rahul Roy, and Ennio Stacchetti were extremely valuable. We are also grateful to a Managing Editor and two anonymous referees for helpful suggestions that significantly improved the paper. Ray is grateful for the warm hospitality of the Department of Economics and STICERD at the London School of Economics, where a first draft of the paper was written. This research was supported by the National Science Foundation under grant 0241070 to Ray.",

year = "2007",

month = oct,

doi = "10.1111/j.1467-937X.2007.00450.x",

language = "English (US)",

volume = "74",

pages = "1125--1147",

journal = "Review of Economic Studies",

issn = "0034-6527",

publisher = "Oxford University Press",

number = "4",

}