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The Role of Trust in Costly Network Formation

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  • Sudipta Sarangi
  • Robert P. Gilles

Abstract

We investigate game theoretic models of entwork formation that are based on individual actions only. Our approach is grounded in three simple and realistic principles. (1) Link formation should be a binary process of consent. (2) Link formation should be costly. (3) The class of network payoff functions should be as general as possible. We provide charecterizations of stable networks under the hypothesis of mutual consent for the case of two-sided and one-sided link formation costs. Furthermore, we introduce a new eqilibrium concept based on a limited, realistic form of farsightedness or (myopic) ''trust'' in network formation. We provide comparisons of the resulting networks with networks satisfying well known stability concepts developed in the literature

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 483.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:483

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Keywords: Social networks; individual stability; pairwsie stability; trust;

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References

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  1. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
  2. Jackson, Matthew O. & van den Nouweland, Anne, 2005. "Strongly stable networks," Games and Economic Behavior, Elsevier, vol. 51(2), pages 420-444, May.
  3. Sudipta Sarangi & H. Haller, . "Nash Networks with Heterogeneous Agents," Departmental Working Papers 2003-06, Department of Economics, Louisiana State University.
  4. Stef Tijs & Anne van den Nouweland & Bhaskar Dutta, 1998. "Link formation in cooperative situations," International Journal of Game Theory, Springer, vol. 27(2), pages 245-256.
  5. Page Jr, Frank H & Wooders, Myrna H & Kamat, Samir, 2001. "Networks And Farsighted Stability," The Warwick Economics Research Paper Series (TWERPS) 621, University of Warwick, Department of Economics.
  6. Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. Monderer, Dov & Shapley, Lloyd S., 1996. "Potential Games," Games and Economic Behavior, Elsevier, vol. 14(1), pages 124-143, May.
  8. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Matthew O. Jackson, 2003. "Allocation Rules for Network Games," Working Papers 2003.51, Fondazione Eni Enrico Mattei.
  10. McBride, Michael, 2008. "Position-specific information in social networks: Are you connected?," Mathematical Social Sciences, Elsevier, vol. 56(2), pages 283-295, September.
  11. repec:ebl:ecbull:v:3:y:2003:i:5:p:1-9 is not listed on IDEAS
  12. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  13. Slikker, Marco & van den Nouweland, Anne, 2001. "A One-Stage Model of Link Formation and Payoff Division," Games and Economic Behavior, Elsevier, vol. 34(1), pages 153-175, January.
  14. Matthew O. Jackson, 2003. "A survey of models of network formation: Stability and efficiency," Working Papers 1161, California Institute of Technology, Division of the Humanities and Social Sciences.
  15. Hart, Sergiu & Mas-Colell, Andreu, 1989. "Potential, Value, and Consistency," Econometrica, Econometric Society, vol. 57(3), pages 589-614, May.
  16. Slikker, M., 2000. "Decision Making and Cooperation Restrictions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-82556, Tilburg University.
  17. Ui, Takashi, 2000. "A Shapley Value Representation of Potential Games," Games and Economic Behavior, Elsevier, vol. 31(1), pages 121-135, April.
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Citations

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Cited by:
  1. Gilles, R.P. & Chakrabarti, S. & Sarangi, S. & Badasyan, N., 2004. "The Role of Middlemen inEfficient and Strongly Pairwise Stable Networks," Discussion Paper 2004-64, Tilburg University, Center for Economic Research.
  2. Gönül Dogan & M.A.L.M. van Assen & Arnout van de Rijt & Vincent Buskens, 2007. "The Stability of Exchange Networks," Working Papers 2007.66, Fondazione Eni Enrico Mattei.
  3. Hans Haller & Sudipta Sarangi, 2003. "Nash Networks with Heterogeneous Agents," Discussion Papers of DIW Berlin 337, DIW Berlin, German Institute for Economic Research.
  4. Borkotokey, Surajit & Sarangi, Sudipta, 2011. "Allocation rules for fixed and flexible networks: the role of players and their links," MPRA Paper 38340, University Library of Munich, Germany.
  5. Daniel E. May, 2008. "Is Bilateralism Consistent with Global Free Trade?," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 7(2), pages 137-152, August.
  6. Marco A. Marini, 2007. "An Overview of Coalitions and Networks Formation Models for Economic Applications," Working Papers 0707, CREI Università degli Studi Roma Tre, revised 2007.
  7. Francis Bloch & Matthew Jackson, 2006. "Definitions of equilibrium in network formation games," International Journal of Game Theory, Springer, vol. 34(3), pages 305-318, October.
  8. Marco Marini, 2007. "An Overview of Coalition & Network Formation Models for Economic Applications," Working Papers 0712, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2007.
  9. Haller, Hans & Sarangi, Sudipta, 2005. "Nash networks with heterogeneous links," Mathematical Social Sciences, Elsevier, vol. 50(2), pages 181-201, September.
  10. Slikker, Marco & Gilles, Robert P. & Norde, Henk & Tijs, Stef, 2005. "Directed networks, allocation properties and hierarchy formation," Mathematical Social Sciences, Elsevier, vol. 49(1), pages 55-80, January.

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