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Networks Emerging in a Volatile World

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  • George Ehrhardt
  • Matteo Marsili
  • Fernando Vega-Redondo

Abstract

The paper proposes a model to study the conditions under which complex networks emerge (or not) when agents are involved in a dynamic coordination setup. The focus, however, is not on the classical issue of equilibrium selection - instead, our aim is to shed light on how agents' efforts to coordinate a¤ect the process of network formation in a large and complex environment. The model posits that, over time, new links are created if they are pro.table, and existing links disappear due to exogenous decay. Alongside this struggle between link creation and link destruction, agents' choices in the coordination game adapt to their current local conditions and thus coevolve with the social network. The dynamic behavior of the system is studied within di¤erent time scales (the long and ultralong runs), which di¤er in the role accorded to the noise that is induced by finite populations. We characterize analytically the evolution of the modelin each case and show that, depending on the time scale under consideration, the process displays discontinuous transitions in overall connectivity, resilient transformations in network topology, and equilibrium multiplicity. This behavior is akin to that observed concerning various network phenomena where coordination and network formation display mutually reinforcing roles.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/08.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/08

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  1. Fafchamps, Marcel & Lund, Susan, 2003. "Risk-sharing networks in rural Philippines," Journal of Development Economics, Elsevier, vol. 71(2), pages 261-287, August.
  2. Goyal, Sanjeev & Vega-Redondo, Fernando, 2005. "Network formation and social coordination," Games and Economic Behavior, Elsevier, vol. 50(2), pages 178-207, February.
  3. Weisbuch, G. & Kirman, A.P. & Herreiner, D., 1996. "Market Organisation," G.R.E.Q.A.M. 96a20, Universite Aix-Marseille III.
  4. Antoni Calvó-Armengol & Matthew O. Jackson, 2004. "The Effects of Social Networks on Employment and Inequality," American Economic Review, American Economic Association, vol. 94(3), pages 426-454, June.
  5. Matthew O. Jackson & Brian W. Rogers, 2007. "Meeting Strangers and Friends of Friends: How Random Are Social Networks?," American Economic Review, American Economic Association, vol. 97(3), pages 890-915, June.
  6. Murgai, Rinku & Winters, Paul & Sadoulet, Elisabeth & Janvry, Alain de, 2002. "Localized and incomplete mutual insurance," Journal of Development Economics, Elsevier, vol. 67(2), pages 245-274, April.
  7. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-18, December.
  8. Hagedoorn, John, 2002. "Inter-firm R&D partnerships: an overview of major trends and patterns since 1960," Research Policy, Elsevier, vol. 31(4), pages 477-492, May.
  9. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
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Cited by:
  1. Mathias Staudigl, 2010. "Potential games in volatile environments," Vienna Economics Papers 1002, University of Vienna, Department of Economics.
  2. M. Koenig & Claudio J. Tessone & Yves Zenou, . "A Dynamic Model of Network Formation with Strategic Interactions," Working Papers CCSS-09-006, ETH Zurich, Chair of Systems Design.
  3. Zenou, Yves & König, Michael D. & Tessone, Claudio J., 0. "Nestedness in networks: A theoretical model and some applications," Theoretical Economics, Econometric Society.
  4. Mathias Staudigl, 2010. "On a General class of stochastic co-evolutionary dynamics," Vienna Economics Papers 1001, University of Vienna, Department of Economics.

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