On the Economics of Efficiency, Bargaining and Welfare Distribution

Abstract

This paper develops a joint analysis of efficiency and distributional issues in an economy in general equilibrium with a focus on bargaining under bounded rationality. Our analysis relies on evolutionary strategies based on the Nash-Harsanyi bargaining model, but we go beyond the Nash-Harsanyi model by generalizing it with ordinal preferences as well as allowing for inefficient bargaining agreements. We show that our evolutionary schemes converge to bargaining agreements under general conditions. The analysis covers the case where the bargaining agreement is inefficient as well as the case where the bargaining process converges to an efficient allocation located on the Pareto utility frontier. We show that the outcome of the bargaining process can be represented by the simple maximization of a “generalized Nash product”. We explore the implications of bargaining agreements for income distribution. Finally, we discuss our model’s insights in analyzing the performance of an economy, emphasizing the roles of preferences, decentralization, and public goods.