A Note on the Cost-Benefit Ratio in Self-Enforcing Agreements

Magnus Hennlock ()
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Magnus Hennlock: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG

No 350, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Since the analysis of a self-enforcing agreement by Barrett (1994) it has been clear that the ratio between the slopes of the marginal cost and marginal benefit functions is conclusive for stability of self-enforcing agreements. For example Finus and Rundshagen (1998) stated: 'it turns out that all qualitative results depend only on this ratio' as it determines the non-orthogonal free-riding response along Nash reaction functions. This note shows that this 'pure' connection between the cost-benefit ratio and non-orthogonal free-riding response occurs due to the 'anonymous contributions' property of public goods, and in such cases the cost-benefit ratio effect holds regardless the functional form of objectives, the formulation of congestion or the degree of impureness of the public good. Therefore we expect to see the cost-benefit ratio still be the conclusive component also in self-enforcing agreements based on more general functional forms than seen hitherto in the literature.

Keywords: public goods; self-enforcing agreements; reaction function; coalition theory (search for similar items in EconPapers)
JEL-codes: C70 H40 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2009-04-03
New Economics Papers: this item is included in nep-gth and nep-pbe
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