A theory of endogenous coalition structures

Consider an environment with widespread externalities, and suppose that binding agreements can be written. We study coalition formation in such a setting. Our analysis proceeds by defining on a partition function an extensive form bargaining game. We establish the existence of a stationary subgame perfect equilibrium for such a game. Our main results are concerned with the characterisation of equilibrium coalition structures. We develop an algorithm that generates (under certain conditions) an equilibrium coalition structure. Our characterisation results are especially sharp for symmetric partition functions. In particular, we provide a uniqueness theorem and apply our results to a Cournot oligopoly.