Implementation of the Ordinal Shapley Value for a three-agent economy



Lemma 1 (a) For a two-agent economy, both agents are indifferent among the OSV
allocations.

(b) The concession c is the same for every OSV allocation and is a continuous function
of the initial endowments.

(c) Let x OSV ((°i, wi)i=1,2) and x0 OSV ((°i,wi + λe)i=1,2), λ > 0. Then,
xi0 Âi xi for i =1, 2.

Proof. (a) As shown in Pérez-Castrillo and Wettstein [2004], the OSV for a two-
agent economy consists of the efficient allocations
(x1,x2) such that x1 ~ w1 + ce and
x
2 ~ w2 + ce for some c 0. Consider now x,y OSV ((°i, ai)i=1,2) and denote by
c
= c12 = c12 and d = d21 = d21 the concessions associated respectively with x and y. Then,
x
1 ^1 a1 + ce, x2 ^2 a2 + ce, y1 ^1 a1 + de, and y2 ^2 a2 + de. It is immediate that x1 1 y1
if and only if x2 2 y2. The efficiency of both allocations x and y implies x1 ^1 y1 and
X
2 ^2 y2.

(b) The previous argument also shows that c = d, while the continuity of preferences
implies that the concession varies continuously with the initial endowments.

(c) There exist c and c0 such that: x1 ~ w1 + ce, x2 ~ w2 + ce, x01 ~ w1 + (λ + c0)e
x
02 ~ w2 + (λ + c0)e. The allocation x0 is Pareto efficient in (°i, wi + λe)i=1,2 whereas x is
feasible, yet not Pareto efficient for the economy
(°i, wi + λe)i=1,2. Hence, it must be the
case that λ
+ c0 > c and x0i Âi xi for i = 1, 2. ■

The next theorem shows that the set of Subgame Perfect equilibrium outcomes (SP E)
of the bidding mechanism coincides with the OSV for economies with at most three agents.

Theorem 1 The bidding mechanism implements the Ordinal Shapley Value in Subgame
Perfect Equilibrium in economies with
n 3.

Proof. The proof proceeds by induction.

(a) We first prove that every SPE outcome of the bidding mechanism is in the
OSV
((°i,wi)iN).

For n = 1 the proof is trivial. Note also that for economies with one agent, there is
only one OSV allocation.

Claim 1. In any SPE, any agent i different than the proposer α accepts the proposal x
at t
= 3 if xi  yi for every i N{α}, where y OSV ((°j, wj (j Bα∕n)e)jN{α^ .



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