Misrepresentation of utilities in bargaining: Pure exchange and public good economies (Q700129)

Tbe aim of this paper is to analyze bargaining in pure exchange and public good economies, when the agents are not informed about their opponents' (payoff) utility information. The technique used to deal with this problem is to embed the original problem into a noncooperative game is misrepresentation and to investigate its equilibrium outcomes. The basic results of the paper state that the set of allocations obtained at a Nash equilibrium in which agents declare linear utilities is equal to the set of constrained Walrasian/Lindahl allocations with respect to the agents' true utilities. W. Thomson (1984, 1988) showed that restricting the true preference to be quasilinear, the above stated equivalence can be extended to hold from 2-agent problems to \(n\)-agent (quasilinear) problems. The main novelty of the paper consists in the proposed to use, instead quasilinearity, the alternative restriction of interiority: interior bundles are strictly preferred to boundary bundles. The class of economies that satisfy the interiority condition has an empty intersection with quasilinear economices, thus the findings of the paper do not apply to quasilinear economies of W. Thomson. The assumption of interiority is important not only for \(n\)-agent bargaining problems but also because the Walrasian/Lindahl rules are proved to coincide with their constrained version. This indicates that, unlike in previous literatur, the above enunciated equivalence on the set of allocations obtained at the Nash equilibrium holds also for the unconstrained Walrasian/Lindahl rules. Several particular aspects of these results show the central role that interiority assumption is playing in public good economics. Namely, that in public good economies, the 2-agent case is tractable without interiority, while for pure exchange economies, interior is really useful in \(n\)-agent game problems. The implications of the bargaining rule being continuous are also examined.