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Experiments with Network Formation

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Author Info
John Duffy
Dean Corbae

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Abstract

We examine how groups of agents form trading networks in the presence of idiosyncratic risk and the possibility of contagion. Specifically, in our model, four agents play a two-stage, finitely repeated game. In the first stage, the network structure is endogenously determined in a noncooperative proposal game. In the second stage, agents play multiple rounds of a coordination game against all of their chosen `neighbors' after the realization of a payoff relevant shock. While parsimonious, our four agent environment is rich enough to capture all of the important interaction structures that have appeared in the networks literature, including bilateral (marriage), local interaction (wheel), star, and uniform matching (complete) networks. Marriage is not only the ex-ante efficient network in our environment, but also stable in the sense of being immune to unilateral deviations. Since our framework admits multiple equilibria, we further examine which types of networks are likely to emerge in an experiment that start subjects out in various symmetric networks but then allows them to endogenously form networks. Consistent with our theory, marriage networks are the most frequent and stable network structures; once a marriage network is endogenously implemented by subjects, it remains in place for the duration of a session. Further, the distribution of network structures is significantly different from that which would result from random link proposals and payoff efficieny in the second stage coordination game is high at around 90 percent of the predicted level. We conclude that our experimental findings provide support for our theoretical predictions.

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Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 292.

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Date of creation: Dec 2006
Date of revision: Aug 2007
Handle: RePEc:pit:wpaper:292

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  20. Esther Hauk & Rosemarie Nagel, 2000. "Choice of Partners in Multiple Two-person Prisoner's Dilemma Games: An Experimental Study," Economics Working Papers 487, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John Duffy & Dean Corbae, 2006. "Experiments with Network Formation," Working Papers 292, University of Pittsburgh, Department of Economics, revised Aug 2007. [Downloadable!]
    Other versions:
  2. Pablo Brañas-Garza & Ramón Cobo-Reyes & Natalia Jiménez & Giovanni Ponti, 2005. "An experimental device to elicit social networks," ThE Papers 05/19, Department of Economic Theory and Economic History of the University of Granada.. [Downloadable!]
  3. Huck, Steffen & Ruchala, Gabriele K. & Tyran, Jean-Robert, 2006. "Competition Fosters Trust," CEPR Discussion Papers 6009, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Zekeriya Eser & Joe Peek, 2006. "Reciprocity and Network Coordination: Evidence from Japanese Banks," Hi-Stat Discussion Paper Series d05-157, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  5. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin & Ott, Marion, 2008. "Myopically Forward-Looking Agents in a Network Formation Game: Theory and Experimental Evidence," Sonderforschungsbereich 504 Publications 08-02, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  6. Falk, Armin & Kosfeld, Michael, 2003. "It's All About Connections: Evidence on Network Formation," CEPR Discussion Papers 3970, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Jacob K. Goeree & Arno Riedl & Aljaz Ule, 2005. "In Search of Stars: Network Formation among Heterogeneous Agents," IZA Discussion Papers 1754, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Matthew O. Jackson, 2002. "The Stability and Efficiency of Economic and Social Networks," Microeconomics 0211011, EconWPA. [Downloadable!]
  9. Harmsen-van Hout Marjolein J.W. & Dellaert Benedict G.C. & Herings P. Jean-Jacques, 2008. "Behavorial Effects in Individual Decisions of Network Formation," Research Memoranda 019, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  10. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Papers 334, University of Pittsburgh, Department of Economics, revised Mar 2008. [Downloadable!]
  11. Yaron Leitner, 2004. "Financial networks: contagion, commitment, and private sector bailouts," Working Papers 02-9, Federal Reserve Bank of Philadelphia. [Downloadable!]
  12. Matthew O. Jackson & Alison Watts, 2005. "Social Games: Matching and the Play of Finitely Repeated Games," Working Papers 2005.38, Fondazione Eni Enrico Mattei. [Downloadable!]
    Other versions:
  13. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin & Ott, Marion & Vogt, Bodo, 2004. "Searching for "Stars" - Recent Experimental Results on Network Formation -," Sonderforschungsbereich 504 Publications 04-34, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  14. Michael Kosfeld, . "Network Experiments," IEW - Working Papers iewwp152, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  15. Matthew O. Jackson, 2003. "A Survey of Models of Network Formation: Stability and Efficiency," Game Theory and Information 0303011, EconWPA. [Downloadable!]
    Other versions:
  16. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin & Ott, Marion, 2005. "A Network Experiment in Continuous Time:," Sonderforschungsbereich 504 Publications 05-02, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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