Strategic Random Networks
AbstractTo study how economic fundamentals affect the formation of social networks, a model is needed that (i) has agents responding rationally to incentives (ii) can be taken to the data. This paper combines game-theoretic and statistical approaches to network formation in order to develop such a model. Agents spend costly resources to socialize. Their effort levels determine the probabilities of relationships, which are valuable for their direct benefits and also because they lead to other relationships in a second stage of “meeting friends of friends”. The model predicts random graphs with tunable degree distributions and clustering, and characterizes how those statistics depend on the economic fundamentals. When the value of friends-of-friends is low, equilibrium networks can be either sparse or thick. But as soon as this value crosses a key threshold, the sparse equilibrium disappears completely and only densely connected networks are possible. This transition mitigates an extreme inefficiency.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 10-21.
Length: 33 pages
Date of creation: Sep 2010
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Web page: http://www.NETinst.org/
network formation; random graphs; random networks; phase transition;
Find related papers by JEL classification:
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-09 (All new papers)
- NEP-CSE-2010-10-09 (Economics of Strategic Management)
- NEP-NET-2010-10-09 (Network Economics)
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