Self-enforcing Stable Sets

We study coalition formation with externalities under voluntary, non-binding participation. Motivated by climate agreements, where standard modeling predicts small, inefficient coalitions, we propose a new solution concept—the self-enforcing stable set. It synthesizes the self-enforcing logic of non-cooperative approaches with the consistency requirement of cooperative forward-looking stability. By endogenizing players' beliefs about the eventual outcomes of negotiations, we show that rational foresight disciplines strategic free-riding and selects constrained Pareto efficient outcomes. In canonical climate-agreement models, this yields sharp predictions: stable coalitions must be large and only mildly fragmented, aligning closely with observed participation patterns.