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Limited farsightedness in network formation

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  • KIRCHSTEIGER, Georg

    ()
    (Université Libre de Bruxelles, ECARES, B-1050 Brussels, Belgium)

  • MANTOVANI, Marco

    ()
    (Università degli studi di Milano, I-20122 Milano, Italy)

  • MAULEON, Ana

    ()
    (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium)

  • VANNETELBOSCH, Vincent

    ()
    (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium)

Abstract

Pairwise stability Jackson and Wolinsky [1996] is the standard stability concept in network formation. It assumes myopic behavior of the agents in the sense that they do not forecast how others might react to their actions. Assuming that agents are perfectly farsighted, related stability concepts have been proposed. We design a simple network formation experiment to test these extreme theories, but find evidence against both of them: the subjects are consistent with an intermediate rule of behavior, which we interpret as a form of limited farsightedness. On aggregate, the selection among multiple pairwise stable networks (and the performance of farsighted stability) crucially depends on the level of farsightedness needed to sustain them, and not on efficiency or cooperative considerations. Individual behavior analysis corroborates this interpretation, and suggests, in general, a low level of farsightedness (around two steps) on the part of the agents.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013033.

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Date of creation: 09 Jul 2013
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Handle: RePEc:cor:louvco:2013033

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Keywords: network formation; experiment; myopic and farsighted stability;

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References

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  1. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
  2. Olivier Tercieux & Vincent Vannetelbosch, 2006. "A characterization of stochastically stable networks," International Journal of Game Theory, Springer, vol. 34(3), pages 351-369, October.
  3. Duranton, Gilles & Martin, Philippe & Mayer, Thierry & Mayneris, Florian, 2010. "The Economics of Clusters: Lessons from the French Experience," OUP Catalogue, Oxford University Press, number 9780199592203.
  4. CAULIER, Jean-François & MAULEON, Ana & VANNETELBOSCH, Vincent, 2013. "Allocation rules for coalitional network games," CORE Discussion Papers 2013032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Falk Armin & Kosfeld Michael, 2012. "It's all about Connections: Evidence on Network Formation," Review of Network Economics, De Gruyter, vol. 11(3), pages 1-36, September.
  6. Jean-Jacques HERINGS & Ana MAULEON & Vincent J. VANNETELBOSCH, 2001. "Rationalizability for Social Environments," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001028, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  7. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
  8. Fleurbaey,Marc & Maniquet,François, 2011. "A Theory of Fairness and Social Welfare," Cambridge Books, Cambridge University Press, number 9780521887427, October.
  9. Licun Xue, 1998. "Coalitional stability under perfect foresight," Economic Theory, Springer, vol. 11(3), pages 603-627.
  10. Ana, MAULEON & Vincent, VANNETELBOSCH, 2003. "Farsightedness and Cautiousness in Coalition Formation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  11. Carrillo, Juan D & Gaduh, Arya, 2012. "The Strategic Formation of Networks: Experimental Evidence," CEPR Discussion Papers 8757, C.E.P.R. Discussion Papers.
  12. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
  13. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  14. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin & Ott, Marion, 2012. "Forward-looking behavior in Hawk–Dove games in endogenous networks: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 75(1), pages 35-52.
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Cited by:
  1. Charness, Gary & Feri, Francesco & Meléndez-Jiménez, Miguel A. & Sutter, Matthias, 2012. "Equilibrium Selection in Experimental Games on Networks," University of California at Santa Barbara, Economics Working Paper Series qt51v6w9hd, Department of Economics, UC Santa Barbara.
  2. B. Hoyer, 2013. "Network Disruption and the Common Enemy Effect," Working Papers 12-06, Utrecht School of Economics.
  3. MAULEON, Ana & MOLIS, Elena & VANNETELBOSCH, Vincent & VERGOTE , Wouter, 2013. "Dominance invariant one-to-one matching problems," CORE Discussion Papers 2013052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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