Game Theory in Economics

Chapter 4, Preferences and Utility

by Lloyd S. Shapley, Martin Shubik


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The fourth chapter of a manuscript dealing with the applications of game theory to economic analysis. This chapter presents a guided tour through those areas of utility theory that relate most closely to the theory of games. While the primary interest is in applying utility theory to develop models for the motivations of individual players in a game, the authors take pains to stress wherever possible the multi-person aspects of utility theory. In that area, an application of game theory to utility theory can sometimes be effected. Some simple but paradoxical bargaining games are analyzed, to see whether the bargainers can have purely ordinal preferences; also, the aggregation of independent preferences is studied to see whether every subset of individuals in a society can have its own independent preference system. There is an extended discussion of the rationales that underlie the use of cardinal utility in economic models. Technical appendixes are included. (See also R-904/1, R-904/2, R-904/3, R-904/6.)

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