Soc Choice Welf (2009) 32:79–92DOI 10.1007/s00355-008-0313-0ORIGINAL PAPER
Twofold optimality of the relative utilitarian bargainingsolution
Marcus Pivato
Received: 9 April 2007 / Accepted: 27 March 2008 / Published online: 16 May 2008© Springer-Verlag 2008
Abstract
Given a bargaining problem, the relative utilitarian (RU) solution maxi-mizes the sum total of the bargainer’s utilities, after having first renormalized eachutility function to range from zero to one. We show that RU is “optimal” in twovery different senses. First, RU is the maximal element (over the set of all bargai-ning solutions) under any partial ordering which satisfies certain axioms of fairnessand consistency; this result is closely analogous to the result of Segal (J Polit Econ108(3):569–589, 2000). Second, RU offers each person the maximum expected utilityamongst all rescaling-invariant solutions, when it is applied to a random sequenceof future bargaining problems generated using a certain class of distributions; this isrecalls the results of Harsanyi (J Polit Econ 61:434–435, 1953) and Karni (Econome-trica 66(6):1405–1415, 1998).
0 Introduction
Let
I
beafinitegroupofindividuals,andlet
A
beasetofsocialoutcomes(e.g.alloca-tionsofsomefinitestockofresources).Ifeach
i
∈
I
hasanordinalpreferencerelationoverthesetofalllotteriesbetweenelementsin
A
,andthispreferencerelationsatisfiescertain axioms, then von Neumann and Morgenstern showed that there is a (“vNM”)cardinal utility function
u
i
:
A
−→
R
−
:=
[0
,
∞
)
such that
i
’s lottery preferences areconsistentwithmaximizationoftheexpectedvalueof
u
i
.Let
u
:=
(
u
i
)
i
∈
I
:
A
−→
R
I
−
be the “joint” utility function, and let
B
be the convex, comprehensive closure of theimage set
u
(
A
)
⊂
R
I
−
; then any element of
B
is an assignment of a vNM utility levelto each player, obtainable through some lottery between elements of
A
.
M. Pivato (
B
)Department of Mathematics, Trent University, 1600 West Bank Drive,Peterborough, ON, Canada K9J 7B8e-mail: marcuspivato@trentu.ca
123
80 M. Pivato
For any
x
,
y
∈
R
I
−
, we write “
x
℘
y
” to mean
x
is Pareto-preferred to
y
(i.e.
∀
i
∈
I
,
x
i
≥
y
i
) and “
x
℘
y
” to mean
x
is strictly Pareto-preferred to
y
(i.e.
∀
i
∈
I
,
x
i
>
y
i
).Let
℘
B
:=
b
∈
B
; ∃
b
∈
B
with
b
℘
b
bethe(weak)
Pareto frontier
of
B
. We assume that the members of
I
can obtain any social outcome in
℘
B
,but only through unanimous consent. Let
a
0
∈
A
represent the “status quo” outcome,which we assume to be Pareto-suboptimal. If
q
:=
u
(
a
0
)
∈
B
, then no
b
∈
℘
B
willbe unanimously accepted unless
b
℘
q
. Thus, the set of admissible bargains is the set
℘
q
B
:=
b
∈
℘
B
;
q
℘
b
.If we forget
A
and the utility functions
{
u
i
}
i
∈
I
, then we are left with an abstract
bargaining problem
on
I
:anorderedpair
(
B
,
q
)
,where
B
⊂
R
I
−
isconvex,compact,and comprehensive, and
q
∈
B
. The problem is to choose some point in
℘
q
B
as thesocial outcome. For simplicity, we assume that
B
is
strictly
convex. Let
B
be the setof all strictly convex bargaining problems over
I
. That is:
B
:=
(
B
,
q
)
;
q
∈
B
⊂
R
I
−
,
and
B
is strictly convex, compact, and comprehensive
.
A
bargaining solution
is a function
σ
:
B
−→
R
I
−
such that, for all
(
B
,
q
)
∈
B
: (1)
σ(
B
,
q
)
∈
B
,and (2)
σ(
B
,
q
)
℘
q
.[Condition(1)isnormallystrengthenedtorequire
σ(
B
,
q
)
∈
℘
q
B
; however, we will use the weaker condition so that axiom
(SL)
inSect.1below make sense. Condition (2) reflects the fact that a bargain requires una-nimous consent; this distinguishes bargaining solutions from social choice functions,which do not posit a status quo point.]For example, the
classic utilitarian
(CU) solution
Υ
:
B
−→
R
I
−
is defined:
Υ(
B
,
q
)
:=
the unique
b
= [
b
i
]
i
∈
I
∈
℘
q
B
which maximizes
i
∈
I
b
i
.
(We have required
B
to be strictly convex precisely to guarantee that this maximizeris unique).Myerson(1981) has shown that
Υ
is the unique bargaining solution whichhas a useful property of “time independence” when applied to lotteries over unknownfuturebargainingproblems.Morebroadlyconstruedasasocialchoicefunction,classicutilitarianism has several philosophically appealing axiomatic characterizations, duetoHarsanyi(1953,1955,1977),d’Aspremont and Gevers(1977),Maskin(1978), and
Ng(1975,1985,2000).
However, CU implicitly assumes that utility functions are “interpersonally com-parable”, which is unjustified in the vNM framework. Indeed, vNM cardinal utilityfunctions are only well-defined up to affine transformations—that is, if
r
i
∈
R
−
and
q
i
∈
R
, then the function
u
i
(
a
)
:=
r
i
·
u
i
(
a
)
+
q
i
is “equivalent” to
u
i
as a descriptionof
i
’s lottery preferences. By applying (distinct) affine-transformations to the utilityfunctions
{
u
i
}
i
∈
I
, we can reshape the bargaining problem
(
B
,
q
)
, thereby changingthe outcome of
Υ
. In this way, the CU solution
Υ
can be easily manipulated by thebargainers in
I
.
123
Twofold optimality of the relative utilitarian bargaining solution 81
Thus,Nash(1950),Kalai and Smorodinsky(1975), and others have insisted that
any meaningful bargaining solution must be
rescaling invariant
—that is, invariantunder any affine transformations of the utility functions
{
u
i
}
i
∈
I
. Formally, let
r
= [
r
i
]
i
∈
I
∈
R
I
−
and
q
= [
q
i
]
i
∈
I
∈
R
I
. If
b
= [
b
i
]
i
∈
I
∈
R
I
, then we define
r
×
b
:= [
r
i
·
b
i
]
i
∈
I
∈
R
I
, and
b
+
q
:= [
b
i
+
q
i
]
i
∈
I
∈
R
I
. If
B
⊂
R
I
−
, thendefine
r
×
B
:={
r
×
b
;
b
∈
B
}
and
B
+
q
:={
b
+
q
;
b
∈
B
}
. If
(
B
,
q
0
)
∈
B
,and
r
,
q
∈
R
2
−
, then
(
r
×
B
+
q
,
r
×
q
0
+
q
)
represents the “same” bargainingproblem as
(
B
,
q
0
)
, encoded using a different (but equivalent) vNM utility func-tion for each
i
∈
I
. If
σ
:
B
−→
R
I
−
is a bargaining solution, then we say that
σ
is
rescaling invariant
(RI) if, for every
r
,
q
∈
R
2
−
and
(
B
,
q
0
)
∈
B
, we have
σ(
r
×
B
+
q
,
r
×
q
0
+
q
)
=
r
×
σ(
B
,
q
0
)
+
q
. Thus, no one can manipulate theoutcome of
σ
by applying an affine transformation to her utility function.One way to achieve RI is to “renormalize” the functions
{
u
i
}
i
∈
I
to each rangefrom zero to one, and then apply the classic utilitarian solution to this renormalizedproblem; this yields the
relative utilitarian
bargaining solution. Formally, let
(
B
,
q
)
be a bargaining problem on
I
. For every
i
∈
I
, let
M
i
:=
max
b
i
;
b
∈
℘
q
B
.
(1)be
i
’s
dictatorship
utilitylevel.Definethe“renormalized”jointutilityfunction
U
B
,
q
:
R
I
−
−→
R
by:
U
B
,
q
(
b
)
:=
i
∈
I
b
i
−
q
i
M
i
−
q
i
(2)The
relative utilitarian
(RU) bargaining solution
Υ(
B
,
q
)
is the point in
℘
q
B
whichmaximizes the value of
U
B
,
q
. Clearly,
Υ
is RI; thus,
Υ
is a variant of utilitaria-nism which obviates the problem of interpersonal utility comparison by effectivelylegislating that each bargainer’s status quo utility is “morally equivalent” to everyother bargainer’s status quo utility; likewise, each bargainer’s dictatorship utility is“morally equivalent” to every other bargainer’s dictatorship utility. In other words, toget
Υ(
B
,
q
)
, we first apply the rescaling function
F
:
R
I
−
−→
R
I
−
defined
F
(
x
)
i
:=
x
i
−
q
i
M
i
−
q
i
,
∀
i
∈
I
.
Thus,
F
(
q
)
=
0
, and if
B
:=
F
(
B
)
, then
M
i
=
1 for all
i
∈
I
. We then apply theclassic utilitarian solution
Υ
to the rescaled problem
(
B
,
0
)
. We then have
Υ(
B
,
q
)
=
F
−
1
Υ(
B
,
0
)
.Like
Υ
—and unlike the
egalitarian
relative egali-tarian
solution of Kalai and Smorodinsky(1975)—
Υ
is willing to make cost/benefittradeoffs which decrease one person’s surplus so as to increase someone else’s sur-plus, as long as the benefits (to the recipient’s utility) exceed the costs (to the donor’sutility). However, like theNash(1950) and Kalai–Smorodinsky solutions (and unlike
Υ
or egalitarianism),
Υ
is rescaling-invariant. As a social choice function, RU admitsseveral appealing axiomatic characterizations, due toCao(1982),Dhillon(1998),
123
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Twofold Optimality of the relative utilitarian bargaining solution
By Marcus Pivato, 16 May 2008
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