Sequentially Stable Coalition Structures

Abstract

In this paper, we examine the question of which coalition structures farsighted players form in coalition formation games with externalities. We introduce a stability concept for a coalition structure called a sequentially stable coalition structure. Our concept of domination between two coalition structures is based on a "step-by-step" approach to describe negotiation steps concretely by restricting how coalition structures can change: when one coalition structure is changed to another one, either (i) only one merging of two separate coalitions into a coalition occurs, or (ii) only one breaking up of a coalition into two separate coalitions happens. As applications of our stability notion, we show that the efficient grand coalition structure can be sequentially stable in simple partition function form games and common pool resource games.

Keywords: coalition formation, common pool resource, partition function, stability

JEL Classification: C70, C71, D62