This paper develops a joint analysis of efficiency and distributional issues in an economy in general equilibrium with a focus on bargaining under bounded rationality. Our analysis relies on evolutionary strategies based on the Nash-Harsanyi bargaining model, but we go beyond the Nash-Harsanyi model by generalizing it with ordinal preferences as well as allowing for inefficient bar gaining agreements. We show that our evolutionary schemes converge to bargaining agreements under general conditions. The analysis covers the case where the bargaining agreement is inefficient as well as the case where the bargaining process converges to an efficient allocation located on the Pareto utility frontier. We show that the outcome of the bargaining process can be represented by the simple maximization of a “generalized Nash product”. We explore the implications of bargaining agreements for income distribution. Finally, we discuss our model’s insights in analyzing the performance of an economy, emphasizing the roles of preferences, decentralization, and public goods.
Binmore, K., Osborne, M. J., & Rubinstein, A. (1992). Noncooperative Models of Bargaining. In Handbook of Game Theory with Economic Applications (Vol. 1, pp. 179-225). Elsevier. https://doi.org/10.1016/S1574-0005(05)80010-4
Binmore, K., Rubinstein, A., & Wolinsky, A. (1986). The Nash Bargaining Solution in Economic Modelling. The RAND Journal of Economics, 17, 176-188. https://doi.org/10.2307/2555382
Chatterjee, K., Dutta, B., Ray, D., & Sengupta, K. (1993). A Noncooperative Theory of Coalitional Bargaining. The Review of Economic Studies, 60, 463-477. https://doi.org/10.2307/2298067
Chavas, J. P. (2015). Coase Revisited: Economic Efficiency under Externalities, Transaction Costs and Non-Convexity. Journal of Institutional and Theoretical Economics, 171, 709-734. https://doi.org/10.1628/093245615X14363478578775
Chavas, J. P., & Wang, R. (2021). Evolutionary Economics under Nonconvexity and Externalities. Oxford Economic Papers, 73, 1369-1389. https://doi.org/10.1093/oep/gpab020
Coase, R. H. (1960). The Problem of Social Cost. Journal of Law and Economics, 3, 1-44. https://doi.org/10.1086/466560
Compte, O., & Jehiel, P. (2010). The Coalitional Nash Bargaining Solution. Econometrica, 78, 1593-1623. https://doi.org/10.3982/ECTA7883
Crockett, S., Oprea, R., & Plott, C. (2011). Extreme Walrasian Dynamics: The Gale Example in the Lab. American Economic Review, 101, 3196-3220. https://doi.org/10.1257/aer.101.7.3196
Deaton, A., & Muellbauer, J. (1980). Economics and Consumer Behavior. Cambridge University Press. https://doi.org/10.1017/CBO9780511805653
Debreu, G. (1959). The Theory of Value: An Axiomatic Analysis of Economic Equilibrium. Wiley.
Ellickson, R. C. (2008). The Household: Informal Order around the Hearth. Princeton University Press.
Forges, F., Mertens, J. F., & Vohra, R. (2002). The Ex-Ante Incentive Compatible Core in the Absence of Wealth Effects. Econometrica, 70, 1865-1892. https://doi.org/10.1111/1468-0262.00356
Gintis, H. (2007). The Dynamics of General Equilibrium. The Economic Journal, 117, 1280-1309. https://doi.org/10.1111/j.1468-0297.2007.02083.x
Hanany, E., & Safra, Z. (2000). Existence and Uniqueness of Ordinal Nash Outcomes. Journal of Economic Theory, 90, 254-276. https://doi.org/10.1006/jeth.1999.2601
Harsanyi, J. C. (1950). Approaches to the Bargaining Problem before and after the Theory of Games: A Critical Discussion of Zeuthen’s Hicks’s and Nash’s Theories. Econometrica, 24, 144-157. https://doi.org/10.2307/1905748
Harsanyi, J. C. (1963). A Simplified Bargaining Model for the n-Person Cooperative Game. International Economic Review, 4, 194-220. https://doi.org/10.2307/2525487
Harsanyi, J. C. (1977). Rational Behavior and Bargaining Equilibrium in Games and Social Situations. Cambridge University Press. https://doi.org/10.1017/CBO9780511571756
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Macmillan Cambridge University Press.
Krueger, A. O. (1974). The Political Economy of the Rent-Seeking Society. American Economic Review, 64, 291-303.
Luenberger, D. G. (1992). Benefit Functions and Duality. Journal of Mathematical Economics, 21, 461-481. https://doi.org/10.1016/0304-4068(92)90035-6
Mandel, A., & Gintis, H. (2016). Decentralized Pricing and the Equivalence between Nash and Walrasian Equilibrium. Journal of Mathematical Economics, 63, 84-92. https://doi.org/10.1016/j.jmateco.2015.12.008
Milanovic, B. (2013). Global Income Inequality in Numbers: In History and Now. Global Policy, 4, 198-208. https://doi.org/10.1111/1758-5899.12032
Murnighan, J. K., Roth, A. E., & Schoumaker, F. (1988). Risk Aversion in Bargaining: An Experimental Study. Journal of Risk and Uncertainty, 1, 101-124. https://doi.org/10.1007/BF00055566
Nash, J. F. (1950). The Bargaining Problem. Econometrica, 18, 155-162.
Nash, J. F. (1953). Two-Person Cooperative Games. Econometrica, 21, 128-140. https://doi.org/10.2307/1906951
Oprea, R. (2020). What Makes Rules Complex? American Economic Review, 110, 3913-3951. https://doi.org/10.1257/aer.20191717
Osborne, M. J., & Rubinstein, A. (1990). Bargaining and Markets. Academic Press.
Ostrom, E. (2000). Collective Action and the Evolution of Social Norms. Journal of Economic Perspectives, 14, 137-158. https://doi.org/10.1257/jep.14.3.137
Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press. https://doi.org/10.4159/9780674369542
Radner, R. (1968). Competitive Equilibrium under Uncertainty. Econometrica, 36, 31-58. https://doi.org/10.2307/1909602
Rose-Ackerman, S. (1975). The Economics of Corruption. Journal of Public Economics, 4, 187-203. https://doi.org/10.1016/0047-2727(75)90017-1
Rubinstein, A. (1982). Perfect Equilibrium in a Bargaining Model. Econometrica, 50, 97-109. https://doi.org/10.2307/1912531
Rubinstein, A. (1998). Modeling Bounded Rationality. Zeuthen Lecture Book Series, MIT Press. https://doi.org/10.7551/mitpress/4702.001.0001
Rubinstein, A., Safra, Z., & Thomson, W. (1992). On the Interpretation of the Nash Bargaining Solution and Its Extension to Non-Expected Utility Preferences. Econometrica, 60, 1171-1186. https://doi.org/10.2307/2951543
Sandholm, W. H. (2010). Population Games and Evolutionary Dynamics. MIT Press.
Simon, H. (1955). A Behavioral Model of Rational Choice. Quarterly Journal of Economics, 69, 99-118.
Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan. https://doi.org/10.1093/oseo/instance.00043218
Takayama, A. (1985). Mathematical Economics. Cambridge University Press.
Vega-Redondo, F. (1997). The Evolution of Walrasian Behavior. Econometrica, 65, 375-384. https://doi.org/10.2307/2171898
Zeuthen, F. (1930). Problems of Monopoly and Economic Warfare. Routledge & Kegan Paul.