A Non-Cooperative Approach to the Compensation Rules for Primeval Games
CentER Discussion Paper No. 2006-97
20 Pages Posted: 25 Oct 2006
Date Written: September 2006
To model inter-individual externalities and analyze the associated compensation issue, Ju and Borm (2005) introduces a new game-theoretic framework, primeval games, and proposes, from a cooperative perspective, three compensation rules as solution concepts for primeval games: the marginalistic rule, the concession rule, and the primeval rule. In this paper, we provide a non-cooperative approach to address these problems more specifically. Inspired by the generalized bidding approach (Ju and Wettstein (2006)) for TU games, we design various bidding mechanisms to fit the model of primeval games and show that each implements the corresponding compensation rule in subgame perfect equilibrium. These mechanisms require nearly no condition on the game environment and obtain each solution itself rather than in expected terms.Moreover, since the various mechanisms share a common basic structure, this paper offers a non-cooperative benchmark to compare different axiomatic solutions, which, in return, may advance the axiomatic study of the issue by constructing alternative compensation rules.
Keywords: externality, compensation, primeval games, marginalistic rule, concession rule, primeval rule, bidding mechanism, implementation
JEL Classification: C71, C72, D62, D63
Suggested Citation: Suggested Citation