Our concern is the extension of the theory of the Shapley value to problems involving externalities. Using the standard axiom systems behind the Shapley value leads to the identification of bounds on players' payoffs around an “externality-free” value. The approach determines the direction and maximum size of Pigouvian-like transfers among players, transfers based on the specific nature of externalities that are compatible with basic normative principles. Examples are provided to illustrate the approach and to draw comparisons with previous literature.

Non-equilibrium models of choice (e.g. level-k reasoning) have significantly different, sometimes more accurate, predictions in games than does Nash equilibrium. When it comes to the maximal set of functions that are implementable in mechanism design, however, they turn out to have similar implications. Focusing on single-valued rules, we discuss the role and implications of different behavioural anchors (arbitrary level-0 play), and prove a level-k revelation principle. If a function is level-k implementable given any level-0 play, it must obey a slight weakening of standard strict incentive constraints. Further, the same condition is also sufficient for level-k implementability, although the role of specific level-0 anchors is more controversial for the sufficiency argument. Nonetheless, our results provide tight characterizations of level-k implementable functions under a variety of level-0 play, including truthful, uniform, and atomless anchors.

The authors study a multilateral bargaining procedure that extends A. Rubinstein's (1982) alternating offer game to the case of n players. The procedure captures the notion of consistency in the sense familiar in cooperative game theory and they use it to establish links to the axiomatic theory of bargaining. Copyright 1996 by The Review of Economic Studies Limited.

More than half of the HIV/AIDS-infected population today are women. We study a dynamic model of (in)fidelity, which explains the HIV/AIDS gender gap by the configuration of sexual networks. Each individual desires sexual relationships with opposite sex individuals. Two Markov matching processes are defined, each corresponding to a different culture of gender relations. The first process leads to egalitarian pairwise stable networks in the long run, and HIV/AIDS is equally prevalent among men and women. The second process leads to anti-egalitarian pairwise stable networks reflecting male domination, and women bear a greater burden. The results are consistent with empirical observations.

In interim economies with asymmetric information, we show that the coarse core of Wilson (1978) does not converge to price equilibrium allocations as the economy is replicated.This failure of core convergence is a basic consequence of asymmetric information and extends to any reasonable notion of either (interim) core or price equilibrium. JEL Classification: C71, D51 Key Words: core, price equilibrium, asymmetric information, interim

Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a “duality” axiom that, roughly speaking, asserts that less risk‐averse individuals accept riskier gambles. The index is positively homogeneous, continuous, and subadditive; respects first‐ and second‐order stochastic dominance; and for normally distributed gambles is half of variance/mean. Examples are calculated, additional properties are derived, and the index is compared with others.

Consider an investor who fears ruin when facing investments that satisfy no-arbitrage. Before investing he can purchase information about the state of nature as an information structure. Given his prior, information structure α investment dominates information structure β if, whenever he is willing to buy β at some price, he is also willing to buy α at that price. We show that this informativeness ordering is complete and is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth, or investment problem. We also show that no prior-independent informativeness ordering based on similar premises exists. (JEL D14, D81, D83, G11)