This paper analyzes the formation of communication networks when players choose endogenously their investment on communication links. We consider two alternative de?nitions of network reliability ; product reliability, where the decay of information depends on the product of the strength of communication links, and min reliability where the speed of connection is a¤ected by the weakest communication link. When investments are separable, the architecture of the efficient network depends crucially on the shape of the transformation function linking investments to the quality of communication links. With increasing marginal returns to investment, the efficient network is a star ; with decreasing marginal returns, the con?ict between maximization of direct and indirect bene?ts prevents a complete characterization of efficient networks. However, with min reliability, the efficient network must be a tree. Furthermore, in the particular case of linear transformation functions, in an e¢ cient network, all links must have equal strength. When investments are perfect complements, the results change drastically : under product reliability, the efficient network must contain a cycle, and is in fact a circle for small societies. With min reliability, the e¢ cient network is either a circle or a line. As in classical models of network formation, e fficient networks may not be supported by private invesment decisions. We provide examples to show that the star may not be stable when the transformation functions is strictly convex. We also note that with perfect substitutes and perfect complements (when the e¢ cient network displays a very symmetric structure), the e¢ cient network can indeed be supported by private investments when the society is large.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Find related papers by JEL classification: D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
This paper has been announced in the following NEP Reports:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Dutta, Bhaskar & Mutuswami, Suresh, 1996.
"Stable Networks,"
Working Papers
971, California Institute of Technology, Division of the Humanities and Social Sciences.
[Downloadable!]
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)