Contractually Stable Alliances

Mauleon, Ana [FUSL] Sempere Monerris, Jose [Universidad de Valencia] Vannetelbosch, Vincent [UCL]

We analyze how dierent rules for exiting an alliance (simple majority, unanimity or unanimity with side payments) will aect the formation of strategic alliances. We find that no alliance structure is contractually stable under the simple majority rule. Once unanimous consent is required, asymmetric alliance structures consisting of two alliances are contractually stable. In addition, the grand alliance which is the ecient structure is stable. Allowing for side payments to compensate former partners improves eciency. Finally, we show that dierent rules of exit may coexist in dierent alliances in the long run.