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Under-connected and over-connected networks: the role of externalities in strategic network formation

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  • Berno Buechel

    ()

  • Tim Hellmann

    ()

Abstract

Since the seminal contribution of Jackson & Wolinsky 1996 [A Strategic Model of Social and Economic Networks, JET 71, 44-74] it has been widely acknowledged that the formation of social networks exhibits a general conflict between individual strategic behavior and collective outcome. What has not been studied systematically are the sources of inefficiency. We approach this gap by analyzing the role of positive and negative externalities of link formation. We find general results that relate situations of positive externalities with stable networks that cannot be "too dense" in a well-defined sense, while situations with negative externalities, tend to induce "too dense" networks.

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Bibliographic Info

Article provided by Springer in its journal Review of Economic Design.

Volume (Year): 16 (2012)
Issue (Month): 1 (March)
Pages: 71-87

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Handle: RePEc:spr:reecde:v:16:y:2012:i:1:p:71-87

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Related research

Keywords: Networks; Connections; Externalities; Spillovers; Stability; Efficiency; D85; C72; L14;

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References

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  1. Jackson, Matthew O. & van den Nouweland, Anne, 2002. "Strongly Stable Networks," Working Papers 1147, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Berno Buechel, 2007. "Network formation with closeness incentives," Working Papers 395, Bielefeld University, Center for Mathematical Economics.
  3. Paul Belleflamme & Francis Bloch, 2001. "Market Sharing Agreements and Collusive Networks," Working Papers 443, Queen Mary, University of London, School of Economics and Finance.
  4. Bloch, Francis & Dutta, Bhaskar, 2009. "Communication networks with endogenous link strength," Games and Economic Behavior, Elsevier, vol. 66(1), pages 39-56, May.
  5. Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
  6. Tim Hellmann, 2009. "Convexity and Complementarity in Network Formation: Implications for the Structure of Pairwise Stable Networks," Working Papers 423, Bielefeld University, Center for Mathematical Economics.
  7. Antoni Calvó-Armengol & Rahmi Ilkiliç, 2005. "Pairwise-Stability and Nash Equilibria in Network Formation," Working Papers 2005.34, Fondazione Eni Enrico Mattei.
  8. Sanjeev Goyal & Sumit Joshi, 2006. "Bilateralism And Free Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 749-778, 08.
  9. Tim Hellmann & Berno Buechel, 2009. "Under-connected and Over-connected Networks," Working Papers 2009.38, Fondazione Eni Enrico Mattei.
  10. Sanjeev Goyal & Sumit Joshi, 2006. "Unequal connections," International Journal of Game Theory, Springer, vol. 34(3), pages 319-349, October.
  11. Subhadip Chakrabarti & Robert P. Gilles, 2005. "Network Potentials," Bonn Econ Discussion Papers bgse28_2005, University of Bonn, Germany.
  12. Francis Bloch & Matthew Jackson, 2006. "Definitions of equilibrium in network formation games," International Journal of Game Theory, Springer, vol. 34(3), pages 305-318, October.
  13. Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  14. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. repec:rne:rneart:v:3:y:2004:i:1:p:19-41 is not listed on IDEAS
  16. Kosfeld Michael, 2004. "Economic Networks in the Laboratory: A Survey," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-23, March.
  17. Goyal, Sanjeev & Vega-Redondo, Fernando, 2007. "Structural holes in social networks," Journal of Economic Theory, Elsevier, vol. 137(1), pages 460-492, November.
  18. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
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Citations

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Cited by:
  1. Berno Buechel & Tim Hellmann, 2008. "Under-connected and over-connected networks," Working Papers 400, Bielefeld University, Center for Mathematical Economics.
  2. König, Michael D. & Battiston, Stefano & Napoletano, Mauro & Schweitzer, Frank, 2012. "The efficiency and stability of R&D networks," Games and Economic Behavior, Elsevier, vol. 75(2), pages 694-713.
  3. Tim Hellmann & Mathias Staudigl, 2012. "Evolution of Social networks," Working Papers 470, Bielefeld University, Center for Mathematical Economics.
  4. Philipp Möhlmeier & Agnieszka Rusinowska & Emily Tanimura, 2013. "A degree-distance-based connections model with negative and positive externalities," Documents de travail du Centre d'Economie de la Sorbonne 13040, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  5. Tim Hellmann, 2013. "On the existence and uniqueness of pairwise stable networks," International Journal of Game Theory, Springer, vol. 42(1), pages 211-237, February.

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