Endogenous Network Formation In the Laboratory
AbstractThis paper provides an experimental test of a theory of endogenous network formation. A group of subjects face a decision problem under uncertainty. The subjects are endowed with a private information about the fundamentals of the problem, and they are supposed to make a decision one after the other. The key feature of the experiment is that a subject can observe the decisions of the preceding subjects by forming links. A link is costly, yet it enables a subject to observe previous decisions of those to whom he is linked. We show that subjects respond to changes in the information structure and the cost of link formation in the expected manner. However, we also show that behavior systematically deviates from the Bayesian benchmark as subjects form more links than theory predicts. Subjects also exhibit a tendency to conform rather than follow their own information. In order to explain this pattern, we provide an econometric model that posits that subjects care about their relative standing in the group. We show that the modified model provides a better fit than a standard QRE.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 1440.
Date of creation: 15 Dec 2006
Date of revision:
Social learning; social interaction; networks; network formation;
Other versions of this item:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-23 (All new papers)
- NEP-EXP-2007-01-23 (Experimental Economics)
- NEP-NET-2007-01-23 (Network Economics)
- NEP-SOC-2007-01-23 (Social Norms & Social Capital)
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