The Impossibility of a Paretian Liberal, Game Theory and Negotiation

Aldo Montesano

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2022, vol. 8, issue 3, No 8, 719-732

Abstract: Abstract Sen (J Polit Econ 78:152–157, 1970) has shown the possible contrast between the social preferences of individuals and their choices. This contrast prevents, in many situations, a social choice that satisfies both Pareto-optimality and liberalism. What liberalism can mean in the field of social choice and the relevance of social organization are briefly discussed. Sen's example, using game theory, determines an equilibrium that is not Pareto-optimal. The contrast between social choice and liberalism discussed by Sen derives from the presence of externalities and happens because it is assumed that individuals are isolated, that is, unable to negotiate with each other to reach a more convenient result for everyone. This paper introduces a kind of negotiation that determines a Pareto-optimal equilibrium if the negotiation is successful. Sen's example leads, using this bargaining process, to a Pareto-optimal equilibrium which is better for both individuals than the Nash equilibrium. This result does not imply that a negotiation always leads to a satisfactory equilibrium. Negotiation can lead to a Pareto-optimal agreement, which, however, is rejected by an individual, as this agreement is no better for him than equilibrium without negotiation, so that Sen’s dilemma reappears.

Keywords: Liberalism; Pareto optimality; Game theory; Bargaining (search for similar items in EconPapers)
JEL-codes: A13 C78 D60 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s40797-021-00152-5

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