A Bargaining Set Based on External and Internal Stability and Endogenous Coalition Formation

A new bargaining set based on notions of both internal and external stability is developed in the context of endogenous coalition formation. It allows to make an explicit distinction between within-group and outside-group deviation options. This type of distinction is not present in current bargaining sets. For the class of weighted majority games, the outcomes in the bargaining set containing a minimal winning coalition are characterized. Furthermore, it is shown that the bargaining set of any homogeneous weighted majority game contains an outcome for which the underlying coalition structure consists of a minimal winning coalition and its complement. The paper also introduces a new class of games called cooperation externalities games. For a symmetric cooperation externalities game conditions are provided such that every outcome in the bargaining set supports the same coalition structure. This coalition structure consists of one coalition of all players with an externality parameter higher than one and a collection of singleton coalitions, one for every player with a cooperation externality parameter lower than one