0.

1 Appendix C: A note on Shapley Value

In the realm of cooperative game theory, Shapley value (Shapley 1953) con-
stitutes a reasonable, or “fair” way to divide the gains from cooperation.
the theory is particularly simple when one characterizes transferrable util-
ity (TU) games. A simple cooperative game with transferrable utility will
constitute, I players forming a coalition which generates a monetary value
(often known as the worth of the coalition). The internal payments of the
members of the coalition are then measurable in monetary terms constituting
transferrable utility.
It is worthwhile to note that, ‘fair’ division of the coalition is not the same
as egalitarianism. Fair division implies that the members in the coalition get
paid according to their marginal contribution.
Consider, i = 1, 2, .., I a set of agents. Denote, S ⊂ I as a coalition
of s agents. Further, denote V (S) as the value generated (or worth of) by
the coalition S. Shapley value, V i (S) measures the marginal contribution of
agent i in the coalition S. It is measured by the contribution of agent i to
her ‘predecessor’ in the coalition divided by total number of permutations
possible in the s party coalition.
To compute Shapley value, consider the grand coalition, I. For any S ⊂ I
and i ∈ / S denote the marginal contribution of i to the coalition S, by m(S, i).
Therefore, it is given by, m(S, i) = V (S {i}) − V (S). For any ordering , π of
S

the players in I (note that π is an one to one relationship, π : I → I) denote

by S(π, i) ⊂ I the set of players that come before i in the ordering given by
i. For any given ordering, if we consider the marginal contributions of every
player i to the set of predecessors of i, it would exhaust V (I). Technically,
P i
i∈I m(S(π, i), i) = V (I). It then follows that V (I) is the average marginal
contribution of i to the set of her predecessors. Since, the total number of
orderings is I!, we have,
1 X
V i (I) = m(S(π, i), i)
I! π

where the sum is taken over all possible orderings π of the players in I.
To take a simple example, consider a firm that produces shoes. Let
A be the agent who owns the factory space and is contemplating renting
his premises for production. Agent B provides of raw materials (leather
strips) and C is the labour. Assume that, there is no dearth of factory
space, i.e., A can generate no value if he can not rent out his premises. This

1
explains, V (A) = 0, his contribution on his own. However, both labour and
raw material is absolutely essential for production. This explains that both
B and C are capable of generating value of one1 each. Any combination
involving any two of A, B and C is certainly value enhancing and thus, the
value increases to 3. Finally, should all three work as a team, the synergy is
maximum and the firm makes 4 per day. Formally put, V (A) = 0, V (B) =
V (C) = 1. V (AB) = V (AC) = V (BC) = 3 and V (ABC) = 4
To calculate the Shapley value of A, B and C in the coalition (ABC)
note that, the possible orders in which the coalition could have been formed
is 3! = 6. These orderings are

{A, B, C}, {A, C, B}, {B, A, C}, {B, C, A}, {C, A, B} and {C, B, A}

. The marginal contribution of A in the ordering ({A, B, C}) and ({A, C, B})
is 0.2 To see this, note that, if A was the first to form the coalition, he has
no predecessors. Therefore, the value A adds to the (trivial) coalition is
V (A) = 0. In the orderings where A is the second to join the coalition, his
contribution would be V (BA) − V (B) when the ordering is ({B, A, C}, and
would be V (CA) − V (C) when the ordering is ({C, A, B}. The marginal
contribution of A in both these cases would be 3 − 1 = 2. Finally, when A is
the last to join the coalition his marginal contribution is V (BCA) − V (BC)
when the ordering is {B, C, A} and V (CBA) − V (CB) when the ordering is
{C, B, A}. Note that in both the cases, his marginal contribution is 4−3 = 1.
Therefore, the Shapley value is,
0+0+2+2+1+1
V A (ABC) = =1
3!
3+1+1+1+1+2 3
V B (ABC) = =
3! 2
C 1+3+1+2+1+1 3
V (ABC) = = .
3! 2
The most important contribution of Shapley value is that, it is an efficient
distribution. To see this, in our example, if the payments to each of the
members in the coalition is paid according to the Shapley value, none of the
members individually or collectively with someone else, would like to break
1
In monetary terms, this could be Rs.1000 per day.
2
Any coalition involving i, j and k is denoted as (ijk), whereas, when the particular
order in which they enter the coalition is denoted by {i, j, k}.

2
away from the coalition. Note that, if A decides to break away, he gets
nothing for himself, while if B and C decides to unilaterally deviate, they
will get only 1 each. Now, consider the possibility of A and B collectively
breaking away from the grand coalition (ABC) and forming their own team.
In this case, V A (AB) = 1 and V B (AB) = 3/2. Since neither, A nor B benefits
breaking away from (ABC), they will not. Will B and C jointly deviate?
Similar arguments will show, that they will not. In fact, if V (ABC) > 4 it
can be easily shown that at least one agent would be strictly worse off by
deviating from breaking (ABC). Thus, a coalition whose members are paid
according to Shapley value would be stable.
However, there is a caveat here. The coalition must have synergic gains.
In other words, the value generated by the coalition should be at least as
much as the value generated by the individual members and any sub coali-
tion excuding him, put together. This is the superadditivity property of the
coalition. Formally put, a coalition involving agents, 1, 2, .., I is supeadditive
if V (12..I) ≥ V (S1 ) + V (S2 ) + ...V (Sn ) where Si is any sub coalition such
T
that Si Sj = Φ.
However, if the supperadditivity property fails to hold, the coalition will
be unstable. To see this, ceteris-paribus let V (AB) = 4. Clearly V (ABC) =
4 < V (AB) + V (C) = 5. In this case, V A (AB) = 3/2 and V B (AB) = 5/2.
However, V A (ABC) = 7/6 and V B (ABC) = 10/6. Clearly, both A and B
would prefer to be a part of (AB) and not (ABC).