Farsighted Stability in Hedonic Games

Abstract

We investigate how rational individuals partition themselves into different coalitions in "hedonic games" [see Banerjee, Konishi and Sonmez (1998) and Bogomolnaia and Jackson (2000)], where individuals' preferences depend solely on the composition of the coalition they belong to. We show that the four solution concepts studied in the literature (core, Nash stability, individual stability and contractual individual stability) exhibit myopia on the part of the players. We amend these notions by endowing players with foresight in that they look many steps ahead and consider only credible outcomes. We show the existence and study the properties of the new solutions, as well as their relation to the previous notions.

JEL Classification: C71, C78