Nonmarket Institutional Structures: Conjectures, Distribution, and Allocative Efficiency

This paper analyzes nonmarket institutional structure in which policymakers from two or more governments negotiate to commonly provide a pure public good or to internalize an externality. Various equilibrium notions for the linkage are examined, including Nash, non-Nash, and Pareto. The theoretical analysis indicates when distributional aspects can be separated from efficiency considerations for a nonmarket linkage. In addition, the authors demonstate that the likelihood of initial formation of such a linkage is related to the number of participants, the type of conjecture formed, and the mix between fixed and variable negotiation costs.