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Bounded rationality and repeated network formation

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  • Beal, Sylvain
  • Querou, Nicolas

Abstract

We define a finite-horizon repeated network formation game with consent, and study the differences induced by different levels of individual rationality. We prove that perfectly rational players will remain unconnected at the equilibrium, while nonempty equilibrium networks may form when, following Neyman (1985), players are assumed to behave as finite automata. We define two types of equilibria, namely the Repeated Nash Network (RNN), in which the same network forms at each period, and the Repeated Nash Equilibrium (RNE), in which different networks may form. We state a sufficient condition under which a given network may be implemented as a RNN. Then, we provide structural properties of RNE. For instance, players may form totally different networks at each period, or the networks within a given RNE may exhibit a total order relationship. Finally we investigate the question of efficiency for both Bentham and Pareto criteria.

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Bibliographic Info

Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 54 (2007)
Issue (Month): 1 (July)
Pages: 71-89

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Handle: RePEc:eee:matsoc:v:54:y:2007:i:1:p:71-89

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Web page: http://www.elsevier.com/locate/inca/505565

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  1. Kalai, Ehud & Stanford, William, 1988. "Finite Rationality and Interpersonal Complexity in Repeated Games," Econometrica, Econometric Society, vol. 56(2), pages 397-410, March.
  2. Goyal, Sanjeev & Vega-Redondo, Fernando, 2005. "Network formation and social coordination," Games and Economic Behavior, Elsevier, vol. 50(2), pages 178-207, February.
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  7. Abreu, Dilip & Rubinstein, Ariel, 1988. "The Structure of Nash Equilibrium in Repeated Games with Finite Automata," Econometrica, Econometric Society, vol. 56(6), pages 1259-81, November.
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  9. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
  10. Bhaskar Dutta & Sayantan Ghosal & Debraj Ray, 2004. "Farsighted Network Formation," Working papers 122, Centre for Development Economics, Delhi School of Economics.
  11. Ellison, Glenn & Fudenberg, Drew, 1995. "Word-of-Mouth Communication and Social Learning," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 93-125, February.
  12. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  13. Rubinstein, Ariel, 1986. "Finite automata play the repeated prisoner's dilemma," Journal of Economic Theory, Elsevier, vol. 39(1), pages 83-96, June.
  14. Antoni Calvó-Armengol & Matthew O. Jackson, 2004. "The Effects of Social Networks on Employment and Inequality," American Economic Review, American Economic Association, vol. 94(3), pages 426-454, June.
  15. Robert P. Gilles & Sudipta Sarangi, 2006. "Building Social Networks," Discussion Papers of DIW Berlin 642, DIW Berlin, German Institute for Economic Research.
  16. Gilles, R.P. & Sarangi, S., 2004. "Social Network Formation with Consent," Discussion Paper 2004-70, Tilburg University, Center for Economic Research.
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Cited by:
  1. Schuster, Stephan, 2012. "Applications in Agent-Based Computational Economics," MPRA Paper 47201, University Library of Munich, Germany.
  2. Schuster, Stephan, 2010. "Network Formation with Adaptive Agents," MPRA Paper 27388, University Library of Munich, Germany.

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