Do Coalitions Matter in Designing Institutions?

Abstract

In this paper, we re-examine the classical questions of implementation theory under complete information in a setting where coalitions are the fundamental behavioral units and the outcomes of their interactions are predicted by applying the solution concept of the core. The planner's exercise consists of designing a code of rights, which specifies the collection of coalitions that have the right to block one outcome by moving to another. A code of individual rights is a code of rights in which only unit coalitions may have blocking powers. We provide necessary and sufficient conditions for implementation (under core equilibria) by codes of rights as well as by codes of individual rights. We show that these two modes of implementation are not equivalent. This result is proven robust and extends to alternative notions of core, such as that of an externally stable core. Therefore, coalitions are shown to bring value added to institutional design. The characterization results address the limitations that restrict the relevance of existing implementation theory.