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Bilateral and Community Enforcement in a Networked Market with Simple Strategies

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Abstract

We present a model of repeated games in large buyer-seller networks in the presence of reputation networks via which buyers share information about past transactions. The model allows us to characterize cooperation networks - networks in which each seller cooperates (by providing high quality goods) with every buyer that is connected to her. To this end, we provide conditions under which: [1] the incentives of a seller s to cooperate depend only on her beliefs with respect to her local neighborhood - a subnetwork that includes seller s and is of a size that is independent of the size of the entire network; and [2] the incentives of a seller s to cooperate can be calculated as if the network was a random tree with seller s at its root. Our characterization sheds light on the welfare costs of relying only on repeated interactions for sustaining cooperation, and on how to mitigate such costs.

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File URL: http://www.brown.edu/Departments/Economics/Papers/2011/2011-2_paper.pdf
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Bibliographic Info

Paper provided by Brown University, Department of Economics in its series Working Papers with number 2011-2.

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Date of creation: 2011
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Handle: RePEc:bro:econwp:2011-2

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Postal: Department of Economics, Brown University, Providence, RI 02912

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Keywords: Networks; moral hazard; graph theory; repeated games;

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Cited by:
  1. Itay Fainmesser, 2010. "Community Structure and Market Outcomes: A Repeated Games in Networks Approach," Working Papers 2010-14, Brown University, Department of Economics.
  2. Itay Fainmesser, 2010. "Social Networks and Unraveling in Labor Markets," Working Papers 2010-15, Brown University, Department of Economics.
  3. Francesco Nava & Michele Piccione, 2011. "Efficiency in Repeated Two-Action Games with Local Monitoring," STICERD - Theoretical Economics Paper Series /2012/560, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.

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