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Peer effects in endogenous networks

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  • Hiller, Timo

Abstract

This paper presents a model of strategic network formation with local complementarities in effort levels and positive local externalities. Results are obtained for a general class of payoff functions, which subsumes the linear-quadratic specification frequently used in theoretical and applied work. We assume homogeneous agents and characterize equilibria for two-sided and one-sided link formation. (Pairwise) Nash equilibrium networks are nested split graphs, which are a strict subset of core-periphery networks. We highlight the relevance of the convexity of the value function for obtaining these structures. More central agents are shown to exert more effort and obtain higher gross payoffs in equilibrium. However, net of linking cost, central agents may obtain strictly lower net payoffs. The curvature of the value function is also important for efficiency considerations. These findings are relevant for many social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms.

Suggested Citation

  • Hiller, Timo, 2017. "Peer effects in endogenous networks," Games and Economic Behavior, Elsevier, vol. 105(C), pages 349-367.
  • Handle: RePEc:eee:gamebe:v:105:y:2017:i:c:p:349-367
    DOI: 10.1016/j.geb.2017.07.010
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    2. in 't Veld, Daan & van der Leij, Marco & Hommes, Cars, 2020. "The formation of a core-periphery structure in heterogeneous financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    3. Xu, Hedong & Fan, Suohai & Tian, Cunzhi & Xiao, Xinrong, 2019. "Evolutionary investor sharing game on networks," Applied Mathematics and Computation, Elsevier, vol. 340(C), pages 138-145.
    4. Allouch, Nizar, 2017. "The cost of segregation in (social) networks," Games and Economic Behavior, Elsevier, vol. 106(C), pages 329-342.
    5. Xu, Hedong & Tian, Cunzhi & Xiao, Xinrong & Fan, Suohai, 2018. "Evolutionary investors’ power-based game on networks," Applied Mathematics and Computation, Elsevier, vol. 330(C), pages 125-133.
    6. Norma Olaizola & Federico Valenciano, 2020. "Dominance of weighted nested split graph networks in connections models," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(1), pages 75-96, March.
    7. Chen, Ying-Ju & Zenou, Yves & Zhou, Junjie, 2020. "Network Topology and Market Structure," CEPR Discussion Papers 14495, C.E.P.R. Discussion Papers.
    8. Emerson Melo, 2018. "A Variational Approach to Network Games," Working Papers 2018.05, Fondazione Eni Enrico Mattei.

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    More about this item

    Keywords

    Strategic network formation; Peer effects; Strategic complements; Positive externalities;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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