Book contents
- Frontmatter
- Contents
- Preface
- Part I Introductory
- Part II Iterative controls
- Part III Non-convexities
- Part IV Cooperatives
- 10 Pareto-improvements and cooperatives
- 11 Achieving Pareto-efficiency in the LMF
- 12 Risk-sharing in Illyria (or the ELMF)
- Appendix: The taxation of economic rent
- Notes
- Bibliography
- Index
11 - Achieving Pareto-efficiency in the LMF
Published online by Cambridge University Press: 19 October 2009
- Frontmatter
- Contents
- Preface
- Part I Introductory
- Part II Iterative controls
- Part III Non-convexities
- Part IV Cooperatives
- 10 Pareto-improvements and cooperatives
- 11 Achieving Pareto-efficiency in the LMF
- 12 Risk-sharing in Illyria (or the ELMF)
- Appendix: The taxation of economic rent
- Notes
- Bibliography
- Index
Summary
Cooperative and free-rider solutions
In ch. 11 I shall discuss possible solutions to a well known problem: how may an LMF escape the prisoners' dilemma and achieve the cooperative instead of the free-rider solution? The difficulty is obvious. Members are rewarded by shares in the net product. Assume (for the moment) what is not essential, that the shares are equal. Also assume what is vital, that these shares exhaust the product. Then the member who “shirks” or free-rides saves his own effort while losing only 1/Nth of this marginal product (in an N-member LMF). The temptation is obvious. Indeed, “honest” members, aware of the possibility, and unable to trust their colleagues, may well feel trapped: who can wish to be a “Stakhanovite sucker” in a world of free-riders? It is not enough to depend on goodwill or some “cooperative spirit.” It is only prudent to assume that most agents are, most of the time, ordinary selfish maximizers, and to design structures (incentive schemes) which accommodate this. It follows that we must somehow provide for contracts or agreements on levels of effort and reward which will be efficient and for an incentive (or enforcement) arrangement such that it pays to honor them, so that each member in turn can expect his colleagues to honor their own: the cooperative solution. I shall consider here some possible ways of doing this.
- Type
- Chapter
- Information
- Information, Incentives and the Economics of Control , pp. 117 - 129Publisher: Cambridge University PressPrint publication year: 1992