How to use Rosen's normalised equilibrium to enforce a socially desirable Pareto efficient solution

Jacek Krawczyk () and Mabel Tidball ()

Working Papers from LAMETA, Universtiy of Montpellier

Abstract: We consider a situation, in which a regulator believes that constraining a complex good created jointly by competitive agents, is socially desirable. Individual levels of outputs that generate the constrained amount of the externality can be computed as a Pareto efficient solution of the agents' joint utility maximisation problem. However, generically, a Pareto efficient solution is not an equilibrium. We suggest the regulator calculates a Nash-Rosen coupled-constraint equilibrium (or a “generalised” Nash equilibrium) and uses the coupled-constraint Lagrange multiplier to formulate a threat, under which the agents will play a decoupled Nash game. An equilibrium of this game will possibly coincide with the Pareto efficient solution. We focus on situations when the constraints are saturated and examine, under which conditions a match between an equilibrium and a Pareto solution is possible. We illustrate our findings using a model for a coordination problem, in which firms' outputs depend on each other and where the output levels are important for the regulator.

Pages: 19 pages
Date: 2009-12, Revised 2011-01
New Economics Papers: this item is included in nep-gth and nep-reg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:lam:wpaper:09-20

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