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Network formation and social coordination

  • Goyal, Sanjeev
  • Vega-Redondo, Fernando

This 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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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 50 (2005)
Issue (Month): 2 (February)
Pages: 178-207

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Handle: RePEc:eee:gamebe:v:50:y:2005:i:2:p:178-207
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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