Renegotiation, Efficiency and the Formation of Coalitions in Games with Externalities

I study a noncooperative multilateral bargaining game of coalition formation, based on underlying TU games in partition form, in which coalitions are allowed to renegotiate agreements. Special attention is devoted to the strategic considerations induced by the possibility of renegotiation and its consequences for the efficiency of bargaining. I deÞne a class of games, relative positive and relative negative externality games, closely related to the standard notions of positive and negative externality games. In relative negative externality games, I Þnd that renegotiation promotes the strategic formation of subcoalitions. On the contrary, in relative positive externality games, renegotiation promotes efficiency by motivating players to form the grand coalition immediately. Thus, the possibility of renegotiation has very different strategic effects in the bargaining game depending on characteristics of the underlying game. Finally, the consequences of renegotiation is determined in several models of coalition formation previously analyzed in the literature. Journal of Economic Literature ClassiÞcation Numbers: C71, C72, C78.