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In search of stars: Network formation among heterogeneous agents

  • Goeree, Jacob K.
  • Riedl, Arno
  • Ule, Aljaz

This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the Bala-Goyal [Bala, V., Goyal, S., 2000. A non-cooperative model of network formation, Econometrica 68, 1131-1230] model of network formation with decay and two-way flow of benefits by introducing agents with lower linking costs or higher benefits to others. Furthermore, agents' types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a "star" structure. While equilibrium predictions fail completely with homogeneous agents, star networks frequently occur with heterogeneous agents. Stars are not born but rather develop: with a high-value agent, the network's centrality, stability, and efficiency all increase over time. A structural econometric model based on best response dynamics and other-regarding preferences is used to analyze individual linking behavior. Maximum-likelihood estimates of the underlying structural parameters, obtained by pooling data from several treatments, allow us to explain the main treatment effects.

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

Volume (Year): 67 (2009)
Issue (Month): 2 (November)
Pages: 445-466

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Handle: RePEc:eee:gamebe:v:67:y:2009:i:2:p:445-466
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  1. Sanjeev Goyal & Marco van der Leij & José Luis Moraga-Gonzàlez, 2004. "Economics: An Emerging Small World?," Working Papers 2004.84, Fondazione Eni Enrico Mattei.
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  13. Haller, Hans & Sarangi, Sudipta, 2005. "Nash networks with heterogeneous links," Mathematical Social Sciences, Elsevier, vol. 50(2), pages 181-201, September.
  14. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences With Simple Tests," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 817-869, August.
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