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Cooperative Microeconomics: A Game-Theoretic Introduction.



By Herve Moulin moulin (mlăN`): see pothole. .

Princeton, NJ: Princeton University Princeton University, at Princeton, N.J.; coeducational; chartered 1746, opened 1747, rechartered 1748, called the College of New Jersey until 1896. Schools and Research Facilities
 Press, 1995. Pp. ix, 454. $49.50.

The one and only normative notion explicitly retained in new welfare economics analysis is that expressed by the Pareto efficiency Pareto efficiency, or Pareto optimality, is an important notion in economics with broad applications in game theory, engineering and the social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency  criterion. In that literature, statements abound of the sort that the economist should only tell people how to approach Pareto efficiency while unspecified others should select from the wide range of Pareto efficient allocations. We may wish to note that the very point of departure of this argument is an explicit value judgment. Normative judgments are unavoidable in economics as we know it.

The proponents of this strategy succeeded in introducing a healthy injection of rigor rigor /rig·or/ (rig´er) [L.] chill; rigidity.

rigor mor´tis  the stiffening of a dead body accompanying depletion of adenosine triphosphate in the muscle fibers.
 into welfare economics. The cost has been an impoverishment of welfare economics discourse, a development that should not be congenial to anyone who claims to be an intellectual descendant of Adam Smith, who, we remember, wrote The Theory of Moral Sentiments before The Wealth of Nations.

A problem with the avoidance of explicitly normative analysis becomes apparent when reading applied microeconomics microeconomics

Study of the economic behaviour of individual consumers, firms, and industries and the distribution of total production and income among them. It considers individuals both as suppliers of land, labour, and capital and as the ultimate consumers of the final
 papers. Often in that literature, specific normative principles are simplistically employed in evaluating the effects of the various policies analyzed, and the main reason for the use of such principles seems to be analytical tractability. A good example is the common practice of adding up consumer and producer surplus and using this sum as a social welfare function. This practice is hardly ever accompanied by a consideration of alternative social welfare functions or even of the implicit normative axioms that could be shown to justify it.

This is not an attack on rigor or practicality in applied economics; quite the opposite. I am firmly convinced that mathematically expressed rigorous analysis is a gift of the highest order to the economist. I also believe that it can be made to produce deep insights when dealing with issues of justice and cooperation, insights that mainstream textbooks often relegate rel·e·gate  
tr.v. rel·e·gat·ed, rel·e·gat·ing, rel·e·gates
1. To assign to an obscure place, position, or condition.

2. To assign to a particular class or category; classify. See Synonyms at commit.
 to a few short chapter sections (some books are better than others in this respect, most notably Mas-Colell, Whinston, and Green [1995]). The publication of Herve Moulin's Cooperative Microeconomics by Princeton University Press came as very welcome news to me, given my concerns expressed above, and I propose to convince you to share my view in the rest of this review. Moulin has written a number of books, including another one on these issues (Moulin 1988), but Cooperative Microeconomics is explicitly written as a graduate microeconomics textbook, for the first time filling this niche with a book centered on welfare economics.

Moulin takes a broad view of cooperation between selfish economic agents. He organizes the book around three modes of cooperation: (i) cooperation by direct agreements, (ii) cooperation in the justice mode, and (iii) cooperation in the decentralized de·cen·tral·ize  
v. de·cen·tral·ized, de·cen·tral·iz·ing, de·cen·tral·iz·es

v.tr.
1. To distribute the administrative functions or powers of (a central authority) among several local authorities.
 mode.

The direct agreements mode is closely connected to the core. All institutional detail is endogenous in this mode, created by agreements that belong to the core. Since the core is often empty in interesting economic situations and large in other interesting situations, this discussion cannot exhaust the topic. Also, limiting our attention to the zero transaction cost story that underlies the core concept is clearly quite restrictive. (This issue is not addressed in most of the literature on welfare economics. It seems to me that we should come to terms with it [see Gilles, Diamantaras, and Ruys 1996], but I shall not criticize this book for not covering what it did not set out to cover.)

The justice mode corresponds to social contract theories of justice. Society chooses a mechanism to divide the surplus that emerges from cooperation. The choice of mechanism is morally deliberate; ethically compelling axiomatic ax·i·o·mat·ic   also ax·i·o·mat·i·cal
adj.
Of, relating to, or resembling an axiom; self-evident: "It's axiomatic in politics that voters won't throw out a presidential incumbent unless they think his challenger will
 properties of it are essential to the discussion. In this view, policy making simplifies to choosing from a menu which mechanism to put in place. Once society has chosen the most appealing collection of axioms that are known to characterize a mechanism, then the mechanism is institutionally fleshed out and allowed to run. This mode also has limitations. The axiomatic characterizations underlying it obtain for mathematically tractable tractable

easy to manage; tolerable.
 domains of possible economies, and one must assume a lot to conclude that their domains include the actual economy around us. Moreover, it is typically necessary to use privately held information in the operation of the mechanism, and this opens the mechanism up to strategic manipulation by agents.

The decentralized mode is designed to respond to the latter criticism. It envisions a framework where some personification personification, figure of speech in which inanimate objects or abstract ideas are endowed with human qualities, e.g., allegorical morality plays where characters include Good Deeds, Beauty, and Death.  of collective authority is the referee of a game of strategy in which agents engage in noncooperative game-theoretic behavior. The equilibrium outcomes of such a game are guaranteed to be immune to selfish behavior of the type corresponding to the specific game-theoretic solution used, and so they provide another menu of mechanisms from which society may choose.

Ideally, we would like to design mechanisms that work well in all three modes. A large part of the message of the book elaborates on a negative answer to this question: Unfortunately, such a mechanism design dream is utopian. Instead of giving up, however, a superior response is to explore the frontiers of what is possible, and this book excels in the exposition of this issue. The author does this in seven chapters.

Chapter 1 elaborates on the meaning of the three modes of cooperation. It provides connections to political theory and philosophy and discusses the connection with standard treatments of welfare economics, stressing the fact that efficiency and equity issues are inseparable. At the same time, the author reassures us that he is not after a grand theory of welfare economics; he dispenses with "utopian social engineering" by citing Popper's celebrated discussion of it (Popper An early Unix POP server, which was written at the University of California at Berkeley.  1966) and the failures of utilitarianism utilitarianism (y'tĭlĭtr`ēənĭzəm, y  and the Nash program to become the panaceas they were intended to be. The discussion quickly turns to a presentation of examples in order to illustrate the issues involved. The creative and widespread use of examples to illuminate abstract concepts is one of the best features of this book, one that other textbook authors have not brought to such a high degree of effectiveness yet.

In Chapter 2, Moulin presents an extended analysis of the core and competitive equilibrium Competitive market equilibrium is the traditional concept of economic equilibrium, appropriate for the analysis of commodity markets with flexible prices and many traders, and serving as the benchmark of efficiency in economic analysis.  in a variety of models with one good and money. By money I mean a good that enters linearly in consumers' utility functions (which are then representing quasi-linear preferences), in other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently
, a carrier for transferable utility Transferable utility is a term used in cooperative game theory and in economics. Utility is transferable if one player can losslessly transfer part of its utility to another player. . Models with only one good in addition to the money good may sound a little too restrictive, but this chapter dispels this notion by presenting in detail illuminating analyses of the Bohm-Bawerk horse market model (where the good is indivisible INDIVISIBLE. That which cannot be separated.
     2. It is important to ascertain when a consideration or a contract, is or is not indivisible. When a consideration is entire and indivisible, and it is against law, the contract is void in toto. 11 Verm. 592; 2 W.
 and each agent wants at most one unit), an oligopoly oligopoly: see monopoly.
oligopoly

Market situation in which producers are so few that the actions of each of them have an impact on price and on competitors. Each producer must consider the effect of a price change on the others.
 model with binary demands, a discussion of existence of competitive equilibrium, an extended discussion of the implications of decreasing marginal costs for efficiency and the core, the possibility of an empty core with nonconvex preferences, and (briefly) some trading games in the Bohm-Bawerk market.

Chapter 3 returns to the core and competitive equilibrium, this time with many goods. This chapter is quite different from the long disquisition dis·qui·si·tion  
n.
A formal discourse on a subject, often in writing.



[Latin disqus
 on the technicalities of core convergence results one might expect. These get an appropriate nod in section 7 of the chapter, where Edgeworth's most famous idea receives its customary geometric treatment. Other sections cover the Shapley-Scarf model of trading of indivisible objects, matching models with and without utility money and the assignment model, the existence and efficiency of competitive equilibria in Arrow-Debreu-McKenzie economies, and Hurwicz's demonstration that Pareto efficiency and voluntary participation are incompatible with strategy-proofness. An appendix provides some proofs in detail. I would have liked more attention to the Hurwicz-related results, but Moulin has already given us more extensive expositions of these in previous books, and some tradeoffs always have to be made to save space.

An even more ground-breaking part of the book commences with Chapter 4. Here Moulin devotes considerable attention to the implications of the normative principle of no envy, which states that no individual should rather have someone else's bundle of commodities. First, Moulin situates this notion in the wider discourse about justice in economic allocation. Then he contrasts it to its main competitor, the stand alone principle, which he covers more extensively in Chapter 5. When discussing the fair division of a jointly owned endowment vector, the stand-alone principle Stand-alone principle

Investment approach that advocates a firm should accept or reject a project by comparing it with securities in the same risk class.
 demands that no individual end up doing better than if he or she alone were consuming the entire vector. This may sound mild (besides obviously compelling), but it can be downright incompatible with no envy, which produces morally questionable recommendations in situations with jointly owned production with decreasing marginal costs. In the rest of the chapter, Moulin discusses the application of the no envy principle to assignment economies, its close relation to competitive equilibria from equal incomes, and the alternative principle of egalitarian equivalence. He ends the chapter with discussions of the resource monotonicity axiom (if an economy acquires more resources, nobody should become worse off) and a discussion of games of the divide-and-choose variety, which are intended to result in envy-free allocations.

Chapter 5 studies the stand-alone principle on a wide variety of economic domains, such as one-input, one-output production with increasing or decreasing marginal costs and economies with public goods. For the latter, Moulin devotes sections to the stand-alone core, ratio equilibrium (first proposed by Kaneko), and the egalitarian equivalent solutions proposed by Moulin. The chapter ends with a section on public bads and other externalities externalities

side-effects, either harmful or beneficial, borne by those not directly involved in the production of a commodity.
 and the usual long and stimulating exercise section. One of the most welcome aspects of this chapter is that it covers some issues of public economic theory that have so far been almost invisible to graduate textbooks, even those covering public finance.

In Chapter 6, Moulin shifts gears and presents a number of specific resource allocation resource allocation Managed care The constellation of activities and decisions which form the basis for prioritizing health care needs  mechanisms that operate on domains with externalities and/or public goods or bads: voting games to select levels of public goods or bads, voluntary contributions towards a public good, exploitation of a commons by means of three different mechanisms. The last of these mechanisms is the serial mechanism that Moulin has developed in collaboration with Scott Shenker Scott Shenker is a Professor of Computer Science at UC Berkeley. He is also the head of the Networking Group and the Vice President of the International Computer Science Institute in Berkeley, California. He received his Sc.B. . These mechanisms reach equilibrium outcomes that are not efficient but that may be considered second-best outcomes. Their strategic properties depend heavily on the presence of convexity Convexity

A measure of the curvature in the relationship between bond prices and bond yields.

Notes:
Positive convexity corresponds to curvature that opens upward. Negative convexity corresponds to curvature that opens downward.
 of preferences and technology (and are undesirable in the absence of convexity). It also turns out that the stand-alone and no envy concepts play a major role in the discussion of the equilibria of these mechanisms.

Chapter 7, the last chapter of the book, provides a survey of the mathematical properties of the core and Shapley value In game theory, a Shapley value, named in honour of Lloyd Shapley, who introduced it in 1953, describes one approach to the fair allocation of gains obtained by cooperation among several actors.  in cooperative games in characteristic function form. This chapter is shorter and different in orientation than the previous ones, giving more attention to general mathematical results and less to examples. It is useful as a guide to how the analyses in the previous chapters relate to the more traditional (and voluminous) work on cooperative game theory.

I highly recommend the book as a complement to the main textbook used in first-year, second-semester graduate courses in microeconomics. I also feel it has a place on the shelves of every economist who does welfare economics in some form. There is no other source with such a lengthy treatment of models with indivisibilities and which gives such thoughtful consideration to issues of economic justice. Also, as I have noted above, Moulin uses exercises masterfully, and he consistently uses the simplest possible model that can illuminate an issue. He does not present competitive equilibrium as the be-all and end-all be all and end all or be-all and end-all  
n.
The quintessential or all-important element: "Not that the more spectacular athleticism is the be all and end all of free skating. Spins . . .
 of economic analysis (which is the only way to obtain a true perspective of the real importance of competitive equilibrium in such analysis even when we don't postulate postulate: see axiom.  this importance a priori a priori

In epistemology, knowledge that is independent of all particular experiences, as opposed to a posteriori (or empirical) knowledge, which derives from experience.
). There is only one reason that keeps me from making this book the main text in a graduate microeconomics course and that is the lack of coverage of the traditional topics of consumer theory, production theory, and noncooperative game theory and its applications to models with adverse selection and moral hazard Moral Hazard

The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the
. A new edition, incorporating a treatment of these issues of the same caliber as the issues already covered, could be a clear winner in the textbook game.

References

Gilles, Robert P., Dimitrios Diamantaras, and Pieter H. M. Ruys. 1996. Valuation, efficiency and cores in economies with costly trade. Working Paper No. 96-01, Virginia Polytechnic Institute.

Mas-Colell, Andreu, Michael D. Whinston, and Jerry R. Green. 1995. Microeconomic mi·cro·ec·o·nom·ics  
n. (used with a sing. verb)
The study of the operations of the components of a national economy, such as individual firms, households, and consumers.
 theory. New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
: Oxford University Press.

Moulin, Herve. 1988. Axioms of cooperative decision making. Econometric Society Monograph 15. Cambridge, UK; New York: Cambridge University Press Cambridge University Press (known colloquially as CUP) is a publisher given a Royal Charter by Henry VIII in 1534, and one of the two privileged presses (the other being Oxford University Press). .

Popper, Karl R. 1966. The open society and its enemies. 5th edition, volume 1. Princeton, NJ: Princeton University Press.

Dimitrios Diamantaras Temple University
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Author:Diamantaras, Dimitrios
Publication:Southern Economic Journal
Article Type:Book Review
Date:Apr 1, 1998
Words:2121
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