Goyal, S. Vega-Redondo, F. (Erasmus Econometric Institute)
Abstract
In many economic and social contexts, individual players choose their partners and also decide on a mode of behavior in interactions with these partners. This paper develops a simple model to examine the interaction between partner choice and individual behavior in games of coordination. An important ingredient of our approach is the way we model partner choice: we suppose that a player can establish ties with other players by investing in costly pair-wise links. We show that individual efforts to balance the costs and benefits of links sharply restrict the range of stable interaction architectures; equilibrium networks are either complete or have the star architecture. Moreover, the process of network formation has powerful effects on individual behavior: if costs of forming links are low then players coordinate on the risk-dominant action, while if costs of forming links are high then they coordinate on the efficient action.
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Publisher Info
Paper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number
EI 9954-/A Revision_Date: 2009-07-29.
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