Marginal Contributions and Externalities in the Value

Abstract

For games in partition function form, we explore the implications of distinguishing between the concepts of intrinsic marginal contributions and externalities. If one requires efficiency for the grand coalition, we provide several results concerning extensions of the Shapley value. Using the axioms of efficiency, anonymity, marginality and monotonicity, we provide upper and lower bounds to players' payoffs when affected by external effects, and a characterization of an ``externality-free'' value. If the grand coalition does not form, we characterize a payoff configuration on the basis of the principle of balanced contributions. We also analyze a game of coalition formation that yields sharp predictions.

Keywords: externalities, marginal contributions, Shapley value, Pigouvian transfers, coalition formation

JEL Classification: C7, D62