Endogenous Groups and Dynamic Selection in Mechanism Design

Area of Science:

• Economics
• Game Theory
• Organizational Economics

Background:

• Existing models often treat organizational form and inequality separately.
• Understanding the interplay between information, inequality, and group formation is crucial for economic stability.

Purpose of the Study:

• To develop a dynamic theory of endogenous risk-sharing groups and their coexistence with individualistic regimes.
• To simultaneously determine inequality and organizational form within an economic model.

Main Methods:

• Utilized numerical techniques and mechanism design re-formulations.
• Employed suitable choices of promised utilities to compute stochastic steady states and transitions.
• Analyzed the impact of coalition prevention costs on organizational emergence.

Main Results:

• Low inequality/high wealth regions favor relative performance (individualistic) regimes.
• High inequality/low wealth regions favor risk-sharing groups.
• Coalition costs can also lead to risk-sharing groups at high wealth levels.

Conclusions:

• Organizational form and inequality are endogenously determined and interdependent.
• Transitions between regimes are driven by inequality exacerbation and changes in utility promises.
• Specific regions of inequality and wealth can lead to persistent organizational forms or high volatility.