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Mistakes in Cooperation: The Stochastic Stability of Edgeworth's Recontracting*

Authors


  • *

     We thank Bob Aumann, Geoffroy de Clippel, Leonardo Felli, Philippe Jehiel, Michihiro Kandori, Eric Maskin, Indra Ray and two anonymous referees for useful suggestions. Serrano acknowledges support from Fundación Banco Herrero, Universidad Carlos III, NSF grant SES-0133113 and Deutsche Bank, and thanks Universidad Carlos III and CEMFI in Madrid and the Institute for Advanced Study in Princeton for their hospitality.

Abstract

We analyse a dynamic trading process of coalitional recontracting in an exchange economy with indivisible goods, where agents may make mistakes with small probability. According to this process, the resistance of a transition from one allocation to another is a function of the number of agents who make mistakes and of the seriousness of each mistake. If preferences are always strict, the unique stochastically stable state is the competitive equilibrium allocation. In economies with indifferences, non-core cycles are sometimes stochastically stable, while some core allocations are not. The robustness of these results is confirmed in a weak coalitional recontracting process.

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