The Core in the Presence of Externalities
László Á. Kóczy
Core,externalities,partition function,behavioural assumptions,equilibrium
Climate Change and Sustainable Development
We generalise the coalition structure core to partition function games. Our definition relies only on one crucial assumption, namely that there is some internal consistency in the game: residuals of the deviation play a game similar to the initial one, and –whenever this is possible– they come to a residual core outcome. Deviating players form their optimistic or pessimistic expectations with this in mind. This leads to a recursive definition of the core. When compared to existing approaches, our core concept has a reduced sensitivity to behavioural assumptions. We look at the core of an economy with a common pool resource defined by Funaki and Yamato (1999) and find that for a number of numerical examples our core concept resolves the puzzle, which arose when more naive approaches were used. We outline possibilities for further extensions.