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Bounded Rationality and Repeated Network Formation

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  • Nicolas Querou

    (Queen's University Belfast)

  • Sylvain Beal

    (CREUSET, University of Saint-Etienne)

Abstract

We define a finite-horizon repeated network formation game with consent, and study the differences induced by different levels of individual rationality. We prove that perfectly rational players will remain unconnected at the equilibrium, while nonempty equilibrium networks may form when, following Neyman (1985), players are assumed to behave as finite automata. We define two types of equilibria, namely the Repeated Nash Network (RNN), in which the same network forms at each period, and the Repeated Nash Equilibrium (RNE), in which different networks may form. We state a sufficient condition under which a given network may be implemented as a RNN. Then, we provide structural properties of RNE. For instance, players may form totally different networks at each period, or the networks within a given RNE may exhibit a total order relationship. Finally we investigate the question of efficiency for both Bentham and Pareto criteria.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2006.74.

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Date of creation: May 2006
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Handle: RePEc:fem:femwpa:2006.74

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Keywords: Repeated Network Formation Game; Two-sided Link Formation Costs; Bounded Rationality; Automata;

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  1. 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.
  2. Abreu, Dilip & Rubinstein, Ariel, 1988. "The Structure of Nash Equilibrium in Repeated Games with Finite Automata," Econometrica, Econometric Society, vol. 56(6), pages 1259-81, November.
  3. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
  4. Ariel Rubinstein, 1997. "Finite automata play the repeated prisioners dilemma," Levine's Working Paper Archive 1639, David K. Levine.
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  7. Sanjeev Goyal & Fernando Vega-Redondo, 2003. "Network Formation and Social Coordination," Working Papers 481, Queen Mary, University of London, School of Economics and Finance.
  8. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Ehud Kalai & William Stanford, 1986. "Finite Rationality and Interpersonal Complexity in Repeated Games," Discussion Papers 679, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
  11. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  12. Matt Jackson, 2003. "The Effects of Social Networks on Employment and Inequality," Theory workshop papers 658612000000000032, UCLA Department of Economics.
  13. Gilles, R.P. & Sarangi, S., 2004. "Social Network Formation with Consent," Discussion Paper 2004-70, Tilburg University, Center for Economic Research.
  14. Watts, Alison, 2002. "Non-myopic formation of circle networks," Economics Letters, Elsevier, vol. 74(2), pages 277-282, January.
  15. Bhaskar Dutta & Sayantan Ghosal & Debraj Ray, 2004. "Farsighted Network Formation," Working papers 122, Centre for Development Economics, Delhi School of Economics.
  16. Robert P. Gilles & Sudipta Sarangi, 2006. "Building Social Networks," Discussion Papers of DIW Berlin 642, DIW Berlin, German Institute for Economic Research.
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Cited by:
  1. Schuster, Stephan, 2012. "Applications in Agent-Based Computational Economics," MPRA Paper 47201, University Library of Munich, Germany.
  2. Schuster, Stephan, 2010. "Network Formation with Adaptive Agents," MPRA Paper 27388, University Library of Munich, Germany.

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