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Network Formation and Social Coordination

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Author Info
Sanjeev Goyal (Queen Mary, University of London)
Fernando Vega-Redondo (Universidad de Alicante; Universitat Pompeu Fabra)

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Abstract

This paper develops a simple model to examine the interaction between partner choice and individual behavior in games of coordination. An important ingredient of our approach is the way we model partner choice: we suppose that a player can establish ties with other players by unilaterally investing in costly pair-wise links. In this context, individual efforts to balance the costs and benefits of links are shown to lead to a unique equilibrium interaction architecture. The dynamics of network formation, however, has powerful effects on individual behavior: if costs of forming links are below a certain threshold then players coordinate on the risk-dominant action, while if costs are above this threshold then they coordinate on the efficient action. These findings are robust to a variety of modifications in the link formation process. For example, it may be posited that, in order for a link to materialize, the link proposal must be two-sided (i.e. put forward by both agents); or that, in case of a unilateral proposal, the link may be refused by the other party (if, say, the latter's net payoff is negative); or that a pair of agents can play the game even if connected only through indirect links.

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Paper provided by Queen Mary, University of London, Department of Economics in its series Working Papers with number 481.

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Date of creation: Jan 2003
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Handle: RePEc:qmw:qmwecw:wp481

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Related research
Keywords: Networks Links Coordination games Equilibrium selection Risk dominance Efficiency

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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D6 - Microeconomics - - Welfare Economics

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  1. Steffen Huck & Gabriele K. Ruchala & Jean-Robert Tyran, 2006. "Competition Fosters Trust," Discussion Papers 06-22, University of Copenhagen. Department of Economics. [Downloadable!]
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  2. Fernando Vega Redondo, 2002. "Building Up Social Capital In A Changing World," Working Papers. Serie AD 2002-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  3. Giorgio Fagiolo, 2005. "A Note on Equilibrium Selection in Polya-Urn Coordination Games," Economics Bulletin, Economics Bulletin, vol. 3(45), pages 1-14. [Downloadable!]
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  4. Sanjeev Goyal, 2003. "Learning in Networks: a survey," Economics Discussion Papers 563, University of Essex, Department of Economics. [Downloadable!]
  5. Siegfried Berninghaus & Karl-Martin Ehrhart & Marion Ott & Bodo Vogt, 2007. "Evolution of networks—an experimental analysis," Journal of Evolutionary Economics, Springer, vol. 17(3), pages 317-347, June. [Downloadable!] (restricted)
  6. 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!]
  7. Cowan,Robin, 2004. "Network models of innovation and knowledge diffusion," Research Memoranda 016, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology. [Downloadable!]
  8. George Ehrhardt & Matteo Marsili & Fernando Vega-Redondo, 2008. "Networks Emerging in a Volatile World," Economics Working Papers ECO2008/08, European University Institute. [Downloadable!]
  9. Mengel, Friederike & Fosco, Constanza, 2007. "Cooperation through Imitation and Exclusion in Networks," MPRA Paper 5258, University Library of Munich, Germany. [Downloadable!]
  10. 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!]
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  11. 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!]
  12. 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.
  13. Filippo VERGARA CAFFARELLI, 2004. "Non-Cooperative Network Formation with Network Maintenance Costs," Economics Working Papers ECO2004/18, European University Institute. [Downloadable!]
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