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http://ssrn.com/abstract=720068
 
 

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Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies


Armando R. Gomes


Washington University in Saint Louis - John M. Olin Business School

Philippe Jehiel


University College London - Department of Economics; Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)


Journal of Political Economy, Vol. 113, pp. 626-667, 2005

Abstract:     
An economy with a finite number of agents and a finite number of states is considered. An exogenous institutional rule prescribes which moves from one state to another are feasible to each coalition. At each time, an agent is called to act with some exogenous probability, and he chooses a coalition, a feasible new state to move the economy to, and side payments between the agents in the coalition. The setup can be applied to various dynamic processes of social and economic interactions such as legislative bargaining, coalition formation, or exchange economies. Whenever agents are unable to write long-term contracts, but are otherwise unconstrained both in their ability to write arbitrary spot contracts and in their ability to collude, there can be long-run inefficiencies (with cycles or inefficient steady states). However, when agents are sufficiently patient, the initial state from which the process starts plays no role in the long run. Moreover, when there exists an efficient state that is free of negative externalities (in the sense that a move away from that state does not hurt the agents whose consent is not required for the move), the system must converge to this efficient state in the long run. It is thus more important to design institutions guaranteeing the existence of an efficient negative externality-free state than to implement a fine initialization of the process.

Accepted Paper Series





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Date posted: May 12, 2005  

Suggested Citation

Gomes, Armando R. and Jehiel, Philippe, Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies. Journal of Political Economy, Vol. 113, pp. 626-667, 2005. Available at SSRN: http://ssrn.com/abstract=720068

Contact Information

Armando R. Gomes (Contact Author)
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
3145607087 (Phone)
Philippe Jehiel
University College London - Department of Economics ( email )
Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )
28, rue des Saints-Peres
75007 Paris
France
+33 1 4458 2873 (Phone)
+33 1 4458 2880 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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