Cooperative Game-theoretic Mechanism Design For Optimal Resource Use

Economic analysis no longer treats the economic system as given since the appearance of Leonid Hurwicz's pioneering work on mechanism design. The failure of the market to provide an effective mechanism for optimal resource use will arise if there exist imperfect market structure, externalities, imperfect information or public goods. These phenomena are prevalent in the current global economy. As a result inefficient outcomes continue to emerge under the conventional market system. Cooperative game theory suggests the possibility of socially optimal and group efficient solutions to decision problems involving strategic actions. This lecture focuses on cooperative game-theoretic design of mechanisms for optimal resource use. Crucial features that are essential for a successful mechanism — individual rationality, group optimality, dynamic consistency, distribution procedures, budget balance, financing, incentives to cooperate and practicable institutional arrangements — are considered. Finally, cooperative game-theoretic mechanism design is used to establish the foundation for an effective policy menu to tackle sub-optimal resource use problems which the conventional market mechanism fails to resolve.