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A Dynamic Model of Network Formation with Strategic Interactions

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  • König, Michael
  • Tessone, Claudio J.
  • Zenou, Yves

Abstract

In order to understand the different characteristics observed in real-world networks, one needs to analyze how and why networks form, the impact of network structure on agents' outcomes, and the evolution of networks over time. For this purpose, we combine a network game introduced by Ballester et al. (2006), where the Nash equilibrium action of each agent is proportional to her Bonacich centrality, with an endogenous network formation process. Links are formed on the basis of agents' centrality while the network is exposed to a volatile environment introducing interruptions in the connections between agents. A remarkable feature of our dynamic network formation process is that, at each period of time, the network is a nested split graph. This graph has very nice mathematical properties and are relatively easy to characterize. We show that there exists a unique stationary network (which is a nested split graph) whose topological properties completely match features exhibited by real-world networks. We also find that there exists a sharp transition in efficiency and network density from highly centralized to decentralized networks.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7521.

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Date of creation: Oct 2009
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Handle: RePEc:cpr:ceprdp:7521

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Keywords: Bonacich centrality; nested split graphs; network formation; social interactions;

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References

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Citations

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Cited by:
  1. Michael D. König & Claudio J. Tessone & Yves Zenou, 2010. "From Assortative To Dissortative Networks: The Role Of Capacity Constraints," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 483-499.
  2. Zenou, Yves & König, Michael D. & Tessone, Claudio J., 0. "Nestedness in networks: A theoretical model and some applications," Theoretical Economics, Econometric Society.
  3. de Marti, Joan & Zenou, Yves, 2009. "Social Networks," Working Paper Series 816, Research Institute of Industrial Economics.
  4. Michael Koenig, 2012. "The Formation of Networks with Local Spillovers and Limited Observability," Discussion Papers 11-004, Stanford Institute for Economic Policy Research.

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