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Dynamic processes of social and economic interactions: on the persistence of inefficiencies

Gomes, A.; Jehiel, P.; (2005) Dynamic processes of social and economic interactions: on the persistence of inefficiencies. Journal of Political Economy , 113 (3) pp. 626-667. 10.1086/429136. Green open access

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Abstract

An economy with a finite number of agents and a finite number of states is considered. An exogenous institutional rule prescribes which 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 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 free of negative externalities (in the sense that a move away from that state does not hurt the agents whose consent is not required for the move), 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.

Type: Article
Title: Dynamic processes of social and economic interactions: on the persistence of inefficiencies
Open access status: An open access version is available from UCL Discovery
DOI: 10.1086/429136
Publisher version: http://dx.doi.org/10.1086/429136
Language: English
Additional information: Published by University of Chicago Press. Please see http://eprints.ucl.ac.uk/14657 for the ELSE Working Paper version
Keywords: JEL classification: D02, D61, D71. Coalitions, rules
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/12634
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