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Exploitation and Cooperation in Networks

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  • Andrea Galeotti

    ()
    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Miguel Mel�ndez

    ()
    (University of Alicante, and University of M�laga)

Abstract

A fundamental question in social sciences is how trust emerges. We provide an answer which relies on the formation of social and economic relationships. We argue that behind trust lies the fact that individuals invest in connections taking into account the potential externalities networks produce. Once social ties are in place, these externalities shape the individuals' incentives to behave efficiently in their interactions and thereby efficient social norms are sustained. We also show that the individual's incentives depend on the architecture of the network as well as on the position of the individual within the network. In particular, when an efficient interaction requires players to mutually cooperate, efficient social norms are easily sustained in symmetric networks. By contrast, when an efficient interaction requires players to play asymmetrically (one cooperates and the other free-rides), efficient social norms are best sustained in fully centralized architectures. We interpret these results indicating that a structural analysis is important to understand how individuals' incentives are shaped in many strategic contexts.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-076/1.

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Date of creation: 08 Jul 2004
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Handle: RePEc:dgr:uvatin:20040076

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Web page: http://www.tinbergen.nl

Related research

Keywords: Repeated games; networks; social norms;

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References

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  1. Matthew Haag & Roger Lagunoff, 2010. "On the Size and Structure of Group cooperation," Levine's Working Paper Archive 506439000000000043, David K. Levine.
  2. Andrea Galeotti & Sanjeev Goyal, 2002. "Network Formation with Heterogeneous Players," Tinbergen Institute Discussion Papers 02-069/1, Tinbergen Institute.
  3. Kosfeld Michael, 2004. "Economic Networks in the Laboratory: A Survey," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-23, March.
  4. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  5. Dutta, B. & Nouweland, C.G.A.M. van den & Tijs, S.H., 1995. "Link formation in cooperative situations," Discussion Paper 1995-35, Tilburg University, Center for Economic Research.
  6. Fernando Vega Redondo, 2002. "Building Up Social Capital In A Changing World," Working Papers. Serie AD 2002-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  7. Miguel A. Meléndez-Jiménez, 2002. "Network Formation And Coordination: Bargaining The Division Of Link Costs," Working Papers. Serie AD 2002-27, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Kandori, Michihiro, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 63-80, January.
  9. Sanjeev Goyal & Sumit Joshi, 2006. "Unequal connections," International Journal of Game Theory, Springer, vol. 34(3), pages 319-349, October.
  10. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  11. Ellison, Glenn, 1994. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 567-88, July.
  12. Joel Sobel, 2002. "Can We Trust Social Capital?," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 139-154, March.
  13. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
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