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A Note on the Cost-Benefit Ratio in Self-Enforcing Agreements

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  • Hennlock, Magnus

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

Since the analysis of a self-enforcing agreement by Barrett (1994) it has been clear that the ratio between the slopes of the marginal cost and marginal benefit functions is conclusive for stability of self-enforcing agreements. For example Finus and Rundshagen (1998) stated: 'it turns out that all qualitative results depend only on this ratio' as it determines the non-orthogonal free-riding response along Nash reaction functions. This note shows that this 'pure' connection between the cost-benefit ratio and non-orthogonal free-riding response occurs due to the 'anonymous contributions' property of public goods, and in such cases the cost-benefit ratio effect holds regardless the functional form of objectives, the formulation of congestion or the degree of impureness of the public good. Therefore we expect to see the cost-benefit ratio still be the conclusive component also in self-enforcing agreements based on more general functional forms than seen hitherto in the literature.

Suggested Citation

  • Hennlock, Magnus, 2009. "A Note on the Cost-Benefit Ratio in Self-Enforcing Agreements," Working Papers in Economics 350, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0350
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    File URL: http://hdl.handle.net/2077/19767
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    public goods; self-enforcing agreements; reaction function; coalition theory;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General

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