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Endogenous Network Formation In the Laboratory

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Author Info
Celen, Bogachan
Hyndman, Kyle

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Abstract

This 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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File URL: http://mpra.ub.uni-muenchen.de/1440/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1440.

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Date of creation: 15 Dec 2006
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Handle: RePEc:pra:mprapa:1440

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Related research
Keywords: Social learning; social interaction; networks; network formation;

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Find related papers by JEL classification:
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

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  21. Dorothea K¸bler & Georg Weizs”cker, 2004. "Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory," Review of Economic Studies, Blackwell Publishing, vol. 71(2), pages 425-441, 04. [Downloadable!] (restricted)
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