This material has been published in Journal of Political Economy 109, 1355-1384 (2001). Copyright 2001 by The University of Chicago.

Coalitional Power and Public Goods

Debraj Ray and Rajiv Vohra

Journal of Political Economy 109, 1355-1384 (2001)

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 Abstract

We study the provision of public goods when all agents have complete information and can write binding agreements. This framework is in deliberate contrast to a traditional view of the free-rider problem based on hidden information and/or voluntary provision. We focus on coalition formation as a potential source of inefficiency. To this end, we develop a notion of an equilibrium coalition structure, based on the assumption that each coalition that forms does so under a rational prediction of the society-wide coalition structure. In a simple model, we characterize the (unique) equilibrium coalition structure. Only in some cases does the equilibrium involve full cooperation, resulting in efficient provision of the public good. In other cases, the equilibrium consists of several coalitions and inefficient provision. However, the degree of inefficiency and the number of possible coalitions are bounded.

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