Stable Coalition Structures with Common Decision Scheme

Abstract

This paper studies the stability of a finite local public goods economy, where a jurisdiction's choice of the public good is given by an exogenous decision scheme. Although it is often assumed in local public good economies with a continuum of agents, this feature is new in the finite case. A major consequence is that when entering a jurisdiction, a player will always shift the choice of the jurisdiction. Surprisingly, it turns out that a Tiebout equilibrium exists for a large class of economies only if the decision scheme solely depends on the most extremes players of a jurisdiction. Under mild assumptions, we demonstrate the existence of a Tiebout equilibrium for such a decision scheme, and the non-emptiness of the core of the associated game as well. This model can be seen as a coalition formation game where agents' decisions are driven by two opposite forces. On the one hand, they seek to enter big coalitions, but on the other hand, agents seek to join coalitions in which they are not too heterogeneous.