Dynamic coalition formation and the core

Abstract

This paper presents a dynamic model of endogenous coalition formation in cooperative games with transferable utility (TU). The players are boundedly rational. At each time step, a player decides which of the existing coalitions to join, and demands a payoff. These decisions are determined by a best-reply rule, given the coalition structure and allocation in the previous period. Further, the players experiment with myopically suboptimal strategies whenever there are potential gains from trade. We establish an isomorphism between the set of absorbing states of the process and the set of core allocations, and show that the process converges to one of these states with probability one whenever the core is non-empty. These results do not require superadditivity of the characteristic function, and they carry over to the case of coalitional values depending on the coalition structure, and to non-transferable utility (NTU) games.