CFDP 2098

Embedding Cooperation in General-equilibrium Models


Publication Date: August 2017

Pages: 51


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.


Kantian optimization, Cooperation, General equilibrium, Market socialism, Global emissions control, Worker-owned firms, Externalities, Public goods

JEL Classification Codes: D50, D60, D62, D70, D91, E19, H21, H23, H41

JEL Classification Codes: D50D60D62D70D91E19H21H23H41