Network Formation and Social Coordination
AbstractThis 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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Bibliographic InfoPaper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 481.
Date of creation: Jan 2003
Date of revision:
Networks; Links; Coordination games; Equilibrium selection; Risk dominance; Efficiency;
Other versions of this item:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D6 - Microeconomics - - Welfare Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-01-19 (All new papers)
- NEP-CDM-2003-01-19 (Collective Decision-Making)
- NEP-COM-2003-01-19 (Industrial Competition)
- NEP-CWA-2003-01-19 (Central & Western Asia)
- NEP-GTH-2003-01-19 (Game Theory)
- NEP-PUB-2003-01-19 (Public Finance)
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