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The Endogenous Formation of Economic Coalitions

Edited by Carlo Carraro

This important book, written by some of the leading scholars in the field, provides a comprehensive overview of recent advances in coalition theory and presents both the latest theoretical developments and novel applications in the field of economics.
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Chapter 4: Farsightedness in coalition formation

Marco Mariotti and Licun Xue


Marco Mariotti and Licun Xue 1. INTRODUCTION The main theme of this chapter is the formalization of the concept of ‘farsightedness’ in the behaviour of coalitions. Loosely speaking, a coalition is farsighted when it looks ahead at the ultimate consequences of its actions. If a subcoalition breaks up from a larger coalition, will this cause further breakups? And how will the members who are excluded from the deviating coalitions react? These are the sort of questions that are addressed in the literature we survey. As an example, the most popular cooperative solution concept, the Core, seems to embody a very limited amount of farsightedness: a coalition will deviate from a given status quo if it perceives the possibility of an immediate improvement, disregarding the possible further developments of play. In fact, things are not so simple, for even the Core can be shown to embody some amount of farsightedness (Ray, 1989). One could analyse in turn the behavioural assumptions implicit in other classical solution concepts, such as for instance the Bargaining Set for cooperative games or the Strong Nash Equilibrium for games in strategic form. But, rather than proceeding case by case, we study here some recent attempts at dealing with the issue of farsightedness in a general way. The lion’s share in this chapter is taken by Greenberg’s (1990) Theory of Social Situations (TOSS in short), for two reasons. Firstly, it is the quintessential general framework, which provides a unified language to treat the issues of interest here...

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