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Strategic Random Networks

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    Abstract

    To 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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    File URL: http://www.netinst.org/Golub_Livne_10-21.pdf
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    Bibliographic Info

    Paper provided by NET Institute in its series Working Papers with number 10-21.

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    Length: 33 pages
    Date of creation: Sep 2010
    Date of revision:
    Handle: RePEc:net:wpaper:1021

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    Web page: http://www.NETinst.org/

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    Keywords: network formation; random graphs; random networks; phase transition;

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    1. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
    2. Mark Granovetter, 2005. "The Impact of Social Structure on Economic Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 33-50, Winter.
    3. Esther Dufluo & Emmanuel Saez, 2003. "The role of information and social interactions in retirement plan decisions: Evidence from a randomized experiment," Framed Field Experiments 00141, The Field Experiments Website.
    4. Edward L. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995. "Crime and Social Interactions," NBER Working Papers 5026, National Bureau of Economic Research, Inc.
    5. Esther Duflo & Emmanuel Saez, 2003. "The Role Of Information And Social Interactions In Retirement Plan Decisions: Evidence From A Randomized Experiment," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 815-842, August.
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