Published online by Cambridge University Press: 02 February 2010
In many social, political, and economic situations individuals form groups rather than operate on their own. For example, communities are formed to share the costs of producing local public goods among the residents, or workers join a labor union to attain a better working contract. In these situations individuals utilize the increasing returns to scale provided by large groups. On the other hand, given the heterogeneity of agents' characteristics and tastes, the decision-making process of a large group may lead to outcomes quite undesirable for some of its members. This observation supports the claim that benefits of size are not unlimited and, on some occasions, a decentralized organization is superior to a large social structure. Thus, instead of a grand coalition containing the entire population, we may observe the emergence of group structures consisting of groups smaller than the grand coalition. The reason for the existence of groups that contain more than one agent but less than the entire society lies in the conflict between increasing returns to scale on the one hand and heterogeneity of agents' preferences on the other.
In this chapter we consider a society consisting of a finite or infinite number of individuals. who are allowed to create subsocieties that lead to a partition of the society into pairwise disjoint groups. Each group in the partition selects an alternative within a policy space available to this group.