A Theory of Endogenous Coalition Structures

Consider an environment with widespread externalities, and suppose that binding agreements can be written. We study coalition for- mation in such a setting. Our analysis proceeds by deØning on a partition function an extensive form bargaining game. We establish the existence of a stationary subgame perfect equilibrium for such a game. Our main results are concerned with the characterization of equilibrium coalition structures. We develop an algorithm that generates (under certain conditions) an equi- librium coalition structure. Our characterization results are especially sharp for symmetric partition functions. In particular, we provide a uniqueness theorem and apply our results to a Cournot oligopoly.