Dynamic Coalition Formation and the Core

Abstract

This paper presents a dynamic model of endogenous coalition formation in cooperative games with transferable utility. 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 (non- cooperative) best-reply rule, given the coalition structure and allocation in the previous period. We show that absorbing states of the process exist if the game is essential. Further, if the players are allowed to experiment with myopically suboptimal strategies whenever there are potential gains from trade, an isomorphism between the set of absorbing states of the process and the set of core allocations can beestablished, and the process converges to one of these states with probability one whenever the core is non-empty. This result holds independently of the form of the characteristic function.TU Games; Coalition Formation; Bounded Rationality; Core