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A cost sharing example in which subsidies are necessary for stability

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  • Bahel, Eric
  • Trudeau, Christian

Abstract

Suppose that agents, who have demands for some goods, cooperate to produce their joint demands. If the technology for the production of these goods improves as the set of cooperating agents grows, we have a justification for subsidies when an agent has such an efficient technology that he is able to generate savings for the group. While it was known that there may exist some stable allocations with subsidies (i.e, negatives cost shares), our contribution is to show that subsidies could in some cases be indispensable for stability. The key for this result to hold is the presence of decreasing returns to scale, which can put many agents in competition for an efficient technology.

Suggested Citation

  • Bahel, Eric & Trudeau, Christian, 2019. "A cost sharing example in which subsidies are necessary for stability," Economics Letters, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:ecolet:v:185:y:2019:i:c:s0165176519303490
    DOI: 10.1016/j.econlet.2019.108701
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    References listed on IDEAS

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    1. Bergantinos, Gustavo & Vidal-Puga, Juan J., 2007. "A fair rule in minimum cost spanning tree problems," Journal of Economic Theory, Elsevier, vol. 137(1), pages 326-352, November.
    2. Herve Moulin, 2004. "Fair Division and Collective Welfare," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633116, December.
    3. Quant, Marieke & Borm, Peter & Reijnierse, Hans, 2006. "Congestion network problems and related games," European Journal of Operational Research, Elsevier, vol. 172(3), pages 919-930, August.
    4. Bahel, Eric & Trudeau, Christian, 2014. "Stable lexicographic rules for shortest path games," Economics Letters, Elsevier, vol. 125(2), pages 266-269.
    5. Trudeau, Christian & Vidal-Puga, Juan, 2017. "On the set of extreme core allocations for minimal cost spanning tree problems," Journal of Economic Theory, Elsevier, vol. 169(C), pages 425-452.
    6. Eric Bahel & Christian Trudeau, 2013. "A discrete cost sharing model with technological cooperation," International Journal of Game Theory, Springer;Game Theory Society, vol. 42(2), pages 439-460, May.
    7. Rosenthal, Edward C., 2013. "Shortest path games," European Journal of Operational Research, Elsevier, vol. 224(1), pages 132-140.
    8. Eric Bahel & Christian Trudeau, 2018. "Stable cost sharing in production allocation games," Review of Economic Design, Springer;Society for Economic Design, vol. 22(1), pages 25-53, June.
    9. Zhao, Jingang, 2018. "Three little-known and yet still significant contributions of Lloyd Shapley," Games and Economic Behavior, Elsevier, vol. 108(C), pages 592-599.
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    Cited by:

    1. Christian Trudeau, 2023. "Minimum cost spanning tree problems as value sharing problems," International Journal of Game Theory, Springer;Game Theory Society, vol. 52(1), pages 253-272, March.
    2. Bahel, Eric, 2021. "Hyperadditive games and applications to networks or matching problems," Journal of Economic Theory, Elsevier, vol. 191(C).

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    More about this item

    Keywords

    Cost sharing; Subsidy; Stability; Returns to scale;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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