Limited farsightedness in network formation
AbstractPairwise stability Jackson and Wolinsky  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 InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013033.
Date of creation: 09 Jul 2013
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network formation; experiment; myopic and farsighted stability;
Other versions of this item:
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-26 (All new papers)
- NEP-CDM-2013-09-26 (Collective Decision-Making)
- NEP-EXP-2013-09-26 (Experimental Economics)
- NEP-GTH-2013-09-26 (Game Theory)
- NEP-NET-2013-09-26 (Network Economics)
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