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Debraj Ray and Rajiv Vohra

Consider an environment with widespread externalities and suppose that binding agreements can be written. We study coalition formation in sucha  setting. Our analysis proceeds by defining on a partition function an extensive form bargaining game. We establish the existence of a stationary subgame perfect equilibrium for such a game. Our main results are concerned with the characterization of equilibrium coalition structures. We develop an algorithm that generates (under certain conditions) an equilibrium coalition structure. Our characterization results are particularly sharp for symmetric partition functions. In particular, we provide a uniqueness theorem and apply our results to a Cournot oligopoly. Journal of Economic Literature Classification Numbers: C71, C72, C78, D62.

Games and Economic Behavior 26, 286--336. Copyright © 1997 Academic Press