This paper presents a dynamic model of endogenous coalition formation in cooperative games with transferable utility. The players are boundedly rational. At e a c h time step, a player decides which of the existing coalitions to join, and demands a payo . These decisions are determined by a best{reply rule, given the coalition structure and allocation in the previous period. Further, the players experiment with myopically suboptimal strategies whenever there are potential gains from trade. We establish an isomorphism between the set of absorbing states of the process and the set of core allocations, and show that the process converges to one of these states with probability one whenever the core is non{empty. These results do not require superadditivity of the characteristic function, and they carry over to the case of coalitional values depending on the coalition structure.

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We present a dynamic model of jurisdiction formation in a society of identical people. The process is described by a Markov chain that is de¯ned by myopic optimization on the part of the players. We show that the process will converge to a Nash equilibrium club structure. Next, we allow for coordination between members of the same club, i. e. club members can form coalitions for one period and deviate jointly. We de¯ne a Nash club equilibrium (NCE) as a strategy con¯guration that is immune to such coalitional deviations. We show that, if one exists, this modi¯ed process will converge to a NCE con¯guration with probability one. Finally, we deal with the case where a NCE fails to exist due to indivisibility problems. When the population size is not an integer multiple of the optimal club size, there will be left over players who prevent the process from settling down. We de¯ne the concept of an approximate Nash club equilibrium (ANCE), which means that all but k players are playing a Nash club equilibrium, where k is de¯ned by the minimal number of left over players. We show that the modi¯ed process converges to an ergodic set of states each of which is ANCE.

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