Farsighted stability in hedonic games

We investigate how rational individuals partition themselves into different coalitions in hedonic games (see Banerjee et al. 2001 and Bogomolnaia and Jackson 2002), where individuals' preferences depend solely on the composition of the coalition they belong to. Given that the four solution concepts studied in the literature (core, Nash stability, individual stability and contractual individual stability) may exhibit myopia on the part of the players, we amend these notions by endowing players with foresight in that they look many steps ahead and consider only credible outcomes. We study the properties of the farsighted stability solutions; in particular, we show that when preferences are strict, coalition structures in the core are farsighted stable and a similar result also holds for Nash stability but not for individual stability and contractual individual stability. We thank Birgit Grodal, Hideo Konishi, an associate editor and two referees for their helpful comments and suggestions. Thanks also go to the audiences at University of Copenhagen, CSAET, 2001, Workshop on Coalitions and Networks at Warwick, 2001, and International Game Theory Conference at Stony Brook, 2001.