Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies

46 Pages Posted: 15 Aug 2001

See all articles by Armando R. Gomes

Armando R. Gomes

Washington University in St. Louis - John M. Olin Business School; Washington University in Saint Louis - John M. Olin Business School

Philippe Jehiel

University College London - Department of Economics; Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)

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Date Written: July 2004

Abstract

An economy with a finite number of agents and a finite number of states is considered. An exogenous institutional rule prescribes what moves from one state to another are feasible to each coalition. At each time an agent is called to act with some exogenous probability, and he chooses a coalition, a feasible new state to move the economy to, and side-payments between the agents in the coalition. The setup can be applied to various dynamic processes of social and economic interactions such as legislative bargaining, coalition formation or exchange economies. Whenever agents are unable to write long-term contracts, but agents are otherwise unconstrained both in their ability to write arbitrary spot contracts and in their ability to collude, there can be long-run inefficiencies (with cycles or inefficient steady states). However, when agents are sufficiently patient, the initial state from which the process starts plays no role in the long-run. Moreover, when there exists an efficient state that is negative-externality-free (in the sense that a move away from that state does not hurt the agents whose consent is not required for the move), then the system must converge to this efficient state in the long-run. It is thus more important to design institutions guaranteeing the existence of an efficient-negative-externality-free state than to implement a fine initialization of the process.

Keywords: Dynamic games, externalities, efficiency, convergence, contracts

JEL Classification: C70, D50, D70

Suggested Citation

Gomes, Armando R. and Gomes, Armando R. and Jehiel, Philippe, Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies (July 2004). Available at SSRN: https://ssrn.com/abstract=279303 or http://dx.doi.org/10.2139/ssrn.279303

Armando R. Gomes (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

Philippe Jehiel

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4458 2873 (Phone)
+33 1 4458 2880 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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