A Theory of Endogenous Coalition Structures

Consider an environment with widespread externalities, and suppose that binding agreements can be written. We study coalition formation in such a setting. Our analysis proceeds by defining on a partition function an extensive-form bargaining game. We establish the existence of a stationary subgame perfect equilibrium for such a game. Our main results are concerned with the characterization of equilibŽ rium coalition structures. We develop an algorithm that generates under certain . conditions an equilibrium coalition structure. Our characterization results are especially sharp for symmetric partition functions. In particular, we provide a uniqueness theorem and apply our results to a Cournot oligopoly. Journal of Economic Literature Classification Numbers: C71, C72, C78, D62. Q 1999 Academic