Resource distribution and stable alliances with endogenous sharing rules

Abstract

This paper analyses alliance formation in a general equilibrium model of a conflict among three agents over a common pool of income. When alliance formation enhances the relative effectiveness of alliance's appropriative activities, the two better endowed agents form an alliance with a fully egalitarian sharing rule, by which they maintain the size of the common pool at the maximum but keep the share of the outside adversary at the minimum. In this case, paradoxically, under some conditions, the welfare of the poorest agent is greatest. If the relative effectiveness of alliance's appropriative activities is only moderately increased by alliance formation due to an incentive problem, an alliance can be formed only between the two less endowed agents. In each case, we derive the conditions on the initial distribution of resource endowments for a stable alliance and consider welfare implications.