Game Theory and Public Policy, SECOND EDITION

Game Theory and Public Policy, SECOND EDITION

Roger A. McCain

This book provides a critical, selective review of concepts from game theory and their applications in public policy, and further suggests some modifications for some of the models (chiefly in cooperative game theory) to improve their applicability to economics and public policy.

Chapter 11: The firm as a coalition

Roger A. McCain

Subjects: economics and finance, game theory, politics and public policy, public policy


For this part of the book, the business firm is envisioned as a coalition in a kind of cooperative game. The members of the coalition are of three types: employees or workers, proprietors, and customers. This chapter has two objectives. First, if we think of the firm as a cooperative coalition then we assume that its decisions are Pareto-optimal as among its members. Thus, one objective is to explore the implications of this assumption, particularly for public policy, and contrast them with the implications of the orthodox theory of the firm. Second, it would be helpful if we could treat the cooperative game of economic organization as a transferable utility game, in which the firm’s decisions first maximize the value of the firm and then distribute that value among the members according to bargaining power or some other distributive schema. In such a case we may regard the firm’s strategic or allocative decisions and its distributive decisions as independent. Thus, the second objective of the chapter is to identify simplifying assumptions and normalizations that would allow this independence, and to explore the limits and implications of these assumptions.

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