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Marginal contribution, reciprocity and equity in segregated groups: Bounded rationality and self-organization in social networks

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Alan Kirman
Sheri Markose ()
Simone Giasante
Paolo Pin

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Abstract

We study the formation of social networks that are based on local interaction and simple rule following. Agents evaluate the profitability of link formation on the basis of the Myerson-Shapley principle that payoffs come from the marginal contribution they make to coalitions. The NP-hard problem associated with the Myerson-Shapley value is replaced by a boundedly rational 'spatially' myopic process. Agents consider payoffs from direct links with their neighbours (level 1) which can include indirect payoffs from neighbours' neighbours (level 2) and up to M-levels that are far from global. Agents dynamically break away from the neighbour to whom they make the least marginal contribution. Computational experiments show that when this self-interested process of link formation operates at level 2 neighbourhoods, agents self-organize into stable and efficient network structures that manifest reciprocity, equity and segregation reminiscent of hunter gather groups. A large literature alleges that this is incompatible with self-interested behaviour and market oriented marginality principle in the allocation of value. We conclude that it is not this valuation principle that needs to be altered to obtain segregated social networks as opposed to global components, but whether it operates at level 1 or level 2 of social neighbourhoods. Remarkably, all M>2 neighbourhood calculations for payoffs leave the efficient network structures identical to the case when M=2.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 629.

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Date of creation: 28 Apr 2007
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Handle: RePEc:esx:essedp:629

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  1. Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers iewwp040, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  2. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
  3. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September. [Downloadable!] (restricted)
  4. Kirman, Alan P, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-36, Spring. [Downloadable!] (restricted)
  5. Matthew Haag & Roger Lagunoff, 2006. "Social Norms, Local Interaction, And Neighborhood Planning ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 265-296, 02. [Downloadable!] (restricted)
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  6. Samuel Bowles & Herbert Gintis, 2000. "The Evolution of Reciprocal Preferences," Working Papers 00-12-072, Santa Fe Institute.
  7. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December. [Downloadable!] (restricted)
  8. Robert Axtell, 2005. "The Complexity of Exchange," Economic Journal, Royal Economic Society, vol. 115(504), pages F193-F210, 06. [Downloadable!] (restricted)
  9. Weisbuch, Gerard & Kirman, Alan & Herreiner, Dorothea, 2000. "Market Organisation and Trading Relationships," Economic Journal, Royal Economic Society, vol. 110(463), pages 411-36, April. [Downloadable!] (restricted)
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