Peer Effects in Endogenous Networks
AbstractThis paper presents a simple model of strategic network formation with local complementarities in effort levels and positive local externalities for a general class of payoff functions. Results are obtained for one-sided and two-sided link creation. In both cases (pairwise) Nash equilibrium networks are nested split graphs, which are a strict subset of core-periphery networks. The relevance of the convexity of the value function (gross payoffs as a function of neighbours' effort levels when best responding) in obtaining nested split graphs is highlighted. Under additional assumptions on payoffs, we show that the only efficient networks are the complete and the empty network. Furthermore, there exists a range of linking cost such that any (pairwise) Nash equilibrium is inefficient and for a strict subset of this range any (pairwise) Nash equilibrium network structure is different from the efficient network. These findings are relevant for a wide range of social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms.
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Bibliographic InfoPaper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number /2013/564.
Date of creation: Sep 2013
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Strategic network formation; peer effects; strategic complements; positive externalities.;
Find related papers by JEL classification:
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-11 (All new papers)
- NEP-CDM-2013-10-11 (Collective Decision-Making)
- NEP-COM-2013-10-11 (Industrial Competition)
- NEP-GTH-2013-10-11 (Game Theory)
- NEP-INO-2013-10-11 (Innovation)
- NEP-MIC-2013-10-11 (Microeconomics)
- NEP-NET-2013-10-11 (Network Economics)
- NEP-SOC-2013-10-11 (Social Norms & Social Capital)
- NEP-URE-2013-10-11 (Urban & Real Estate Economics)
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