Sharing the Gains from Regional Cooperation: A Game Theoretic Application to Planning Investment in Electric Power

THE DISTRIBUTION OF THE GAINS from cooperation between two or more economic agents is a problem that appears in several contexts in economics: bilateral monopoly, oligopoly theory, and the theory of regional cooperation.2 This paper concerns regional cooperation in planning investment in electric power, with reference to the four states of the Southern Electricity Region of India (Andhra Pradesh, Kerala, Mysore, and Tamil Nadu). The problem is to achieve a mutually acceptable basis for agreement, such that it's in each state's own interest to cooperate. At present, although regional planning has been accepted in principle by the Central Government of India and in greater or lesser degree by the various states, each State Electricity Board is planning on the assumption of self-sufficiency and there is little cooperation between the various Boards. Continuation of these policies will result in sub-optimal development of the electric power resources in the region: a relative neglect of the excellent hydro resources in Mysore and Kerala, in favor of less economic nonhydro power resources in Andhra Pradesh and Tamil Nadu.