Embedding Cooperation in General-equilibrium Models

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.