Theoretical Economics 13 (2018), 307–340 1555-7561/20180307 Collusion constrained equilibrium Rohan Dutta Department of Economics, McGill University David K. Levine Department of Economics, European University Institute and Department of Economics, Washington University in Saint Louis Salvatore Modica Department of Economics, Università di Palermo We study collusion within groups in noncooperative games. The primitives are the preferences of the players, their assignment to nonoverlapping groups, and the goals of the groups. Our notion of collusion is that a group coordinates the play of its members among different incentive compatible plans to best achieve its goals. Unfortunately, equilibria that meet this requirement need not exist. We instead introduce the weaker notion of collusion constrained equilibrium. This al- lows groups to put positive probability on alternatives that are suboptimal for the group in certain razor’s edge cases where the set of incentive compatible plans changes discontinuously. These collusion constrained equilibria exist and are a subset of the correlated equilibria of the underlying game. We examine four per- turbations of the underlying game. In each case,we show that equilibria in which groups choose the best alternative exist and that limits of these equilibria lead to collusion constrained equilibria. We also show that for a sufficiently broad class of perturbations, every collusion constrained equilibrium arises as such a limit. We give an application to a voter participation game that shows how collusion constraints may be socially costly. Keywords. Collusion, organization, group. JEL classification. C72, D70. 1. Introduction As the literature on collective action (for example, Olson 1965) emphasizes, groups often behave collusively while the preferences of individual group members limit the possi- Rohan Dutta:
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