TITLE:
On the Economics of Efficiency, Bargaining and Welfare Distribution
AUTHORS:
Jean-Paul Chavas, Mingcong Pan
KEYWORDS:
Efficiency, Bargaining, Distribution, Bounded Rationality, Ordinal Preferences, Public Goods
JOURNAL NAME:
Theoretical Economics Letters,
Vol.12 No.1,
February
8,
2022
ABSTRACT: This paper develops a joint analysis of efficiency
and distributional issues in an economy in
general equilibrium with a focus on bargaining under bounded
rationality. Our analysis relies on evolutionary strategies based on the Nash-Harsanyi
bargaining model, but we go beyond the Nash-Harsanyi model by generalizing it
with ordinal preferences as well as allowing for inefficient bargaining agreements. We show that our evolutionary
schemes converge to bargaining agreements under general conditions. The
analysis covers the case where the bargaining agreement is inefficient as well
as the case where the bargaining process converges to an efficient allocation
located on the Pareto utility frontier. We show that the outcome of the
bargaining process can be represented by the simple maximization of a
“generalized Nash product”. We explore the implications of bargaining
agreements for income distribution. Finally, we discuss our model’s insights in
analyzing the performance of an economy, emphasizing the roles of preferences,
decentralization, and public goods.