Coalition formation with optimal transfers when players are heterogeneous and inequality averse

Marco Rogna and Carla Vogt

No 865, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Obtaining significant levels of cooperation in public good and environmental games, under the assumption of players being purely selfish, is usually prevented by the problem of freeriding. Coalitions, in fact, generally fail to be internally stable and this cause a serious underprovision of the public good together with a significant welfare loss. The assumption of relational preferences, capable of better explaining economic behaviors in laboratory experiments, helps to foster cooperation, but, without opportune transfers scheme, no substantial improvements are reached. The present paper proposes an optimal transfers scheme under the assumption of players having Fehr and Schmidt (1999) utility functions, whose objective is to guarantee internal stability and to maximize the sum of utilities of coalition members. The transfers scheme is tested on a public good contribution game parameterized on the data provided by the RICE model and benchmarked with other popular transfers scheme in environmental economics. The proposed scheme outperforms its benchmarking counterparts in stabilizing coalitions and sensibly increases cooperation compared to the absence of transfers. Furthermore, for high but not extreme values of the parameter governing the intensity of dis-utility from disadvantageous inequality, it manages to support very large coalitions including three quarters of all players.

Keywords: climate policy; coalitions; inequality aversion; RICE model; transfers scheme (search for similar items in EconPapers)
JEL-codes: C72 D63 H41 Q54 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cdm, nep-exp, nep-gth and nep-upt
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:865

DOI: 10.4419/96973002

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