AbstractA new model of strategic network formation is developed and analyzed, where an agent's investment in links is nonspecific. The model comprises a large class of games which are both potential and super- or submodular games. We obtain comparative statics results for Nash equilibria with respect to investment costs for supermodular as well as submodular networking games. We also study logit-perturbed best-response dynamics for supermodular games with potentials. We find that the associated set of stochastically stable states forms a sublattice of the lattice of Nash equilibria and derive comparative statics results for the smallest and the largest stochastically stable state. Finally, we provide a broad spectrum of applications from social interaction to industrial organization. Models of strategic network formation typically assume that each agent selects his direct links to other agents in which to invest. Nonspecific networking means that an agent cannot select a specific subset of feasible links which he wants to establish or strengthen. Rather, each agent chooses an effort level or intensity of networking. In the simplest case, the agent faces a binary choice: to network or not to network. If an agent increases his networking effort, all direct links to other agents are strengthened to various degrees. We assume that benefits accrue only from direct links. The set of agents or players is finite. Each agent has a finite strategy set consisting of the networking levels to choose from. For any pair of agents, their networking levels determine the individual benefits which they obtain from interacting with each other. An agent derives an aggregate benefit from the pairwise interactions with all others. In addition, the agent incurs networking costs, which are a function of the agent's own networking level. The agent's payoff is his aggregate benefit minus his cost.
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Bibliographic InfoPaper provided by EconWPA in its series Game Theory and Information with number 0403005.
Length: 37 pages
Date of creation: 30 Mar 2004
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Network Formation; Potential Games; Supermodular Games;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
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