Journal of Economic Literature (JEL) Code(s)
D50, D60, D62, D70, D91, E19, H21, H23, H41
Humans cooperate a great deal in economic activity, but our two major models of equilibrium – Walrasian competitive in markets and Nash in games – portray us as only non-cooperative. In earlier work, I have proposed a model of cooperative decision making (Kantian optimization); here, I embed Kantian optimization in general equilibrium models and show that ‘Walras-Kant’ equilibria exist and often resolve ineﬀiciencies associated with income taxation, public goods and bads, and non-traditional ﬁrm ownership, which typically plague models where agents are Nash optimizers. In four examples, introducing Kantian optimization in one market – often the labor market – suﬀices to internalize externalities, generating Pareto eﬀicient equilibria in their presence. The scope for eﬀicient decentralization via markets appears to be signiﬁcantly broadened with cooperative behavior.
Roemer, John E., "Embedding Cooperation in General-equilibrium Models" (2017). Cowles Foundation Discussion Papers. 184.