Listen before you link: Optimal monitoring rules for communication networks

I consider environments where communication networks are endogenous, but monitoring rules enforce agents to ask consent from others to form new links or break their existing links. A monitoring rule consists of a number x and a collection of groups O such that each agent requires consent from x number of agents in every group she belongs to. First, I show that efficient networks can have at most one component when externalities are positive, whereas they can have multiple components when externalities are negative. Second, I find that partitioning set of agents into groups based on components of the efficient network forms “smallest groups” that can internalize all of externalities; therefore, they can stabilize the efficient network with minimum number of monitors. I relate this finding to the widespread adoption of “small work groups with few monitors” (like Quality Circles) by quality management programs to enhance communication between developers.