Growth and coalition formation Davide Fiaschi University of Pisa E-mail: dfiaschi@ec.unipi.it Pier Mario Pacini University of Pisa E-mail: pmpacini@ec.unipi.it 1st October 2003 Abstract In this paper we analyse a growth model where agents have different factors’endowments and form coalitions to produce output. Economic growth is the result of accumulation of human capital. The latter is a by-product of production activity within a coalition. The grand coalition corresponds to the maximum efficient agents’allocation. However, due to heterogeneous endowments rich agents could not be an incentive to form a coalition with poor agents if rule governing the division of coalition output states an equal sharing among all members of coalitions. Rich agents tend to form coalitions among themselves and poor agents cannot benefit of positive externalities of coalescing with richer agents. This determines both a lower output and a lower long-run growth rate. Keywords : coalition formation, growth, stratification, inequality. JEL classification numbers : C72, D31, O12, O15. 1 Introduction Traditionally growth models consider an economy with one representative agent and one representative firm, so that output depends only on the efficient use of the aggregate supply of factors. However production is generally distributed among a large number of different firms and their output is the result of the joint work of many individuals with heterogeneous endowments. To tackle this aspect the present paper analyses a growth model where agents have different factors’ endowments and production is performed within different groups of agents (coalition in the sequel), that coalesce conferring their endowments to the group production activity. Thus coalition formation becomes a relevant issue for growth theory (see Aghion, Caroli, and Garcia-Penalosa (1999)). In this model economic growth is the result of the accumulation of human capital. The latter is a by-product of the production activity within a coali- tion, i.e. human capital is accumulated via learning by doing. The aim is to catch the positive externality generated by working in a team, where different individual working experiences are mixed together producing in turn new know- ledge (distribution and cross-fertilization effects ). We assume that the diffusion of knowledge is limited to the members of a coalition; thus the grand coalition corresponds to the maximum efficient allocation for this economy, i.e. it implies both the maximum output and the maximum growth rate. However, due to 1