Stochastic stability under logit choice in coalitional bargaining problems

Abstract

This study examines a dynamic process of n-person coalitional bargaining problems. We investigate the evolution of social conventions by embedding a coalitional bargaining setting in a dynamic process. In each period, a group of players may make some coalitional move, that is, forming a new team or negotiating the division of a surplus. Players revise their coalitions and surplus divisions over time in the presence of stochastic noise, which leads players to make a suboptimal decision. Under a logit specification of choice probabilities, we find that the stability of a core allocation decreases in the wealth of the richest player. Furthermore, stochastically stable allocations are core allocations that minimize the wealth of the richest player.