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Network structure and strategic investments: An experimental analysis

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  • Rosenkranz, Stephanie
  • Weitzel, Utz

Abstract

This paper experimentally analyzes the effect of network structures on individualsʼ decisions in a game of strategic substitutes. The theoretical basis for our experiment is the model of Bramoullé and Kranton (2007). As predicted, we find that individuals are able to coordinate on equilibria, but that coordination strongly depends on the network structure. Despite frequent coordination failures, in graphs of size N=4 equilibrium play seems easier on network architectures with high (low) density and low (high) centrality. If play converges, it almost exclusively does so towards the predicted equilibria. Theoretical results with respect to welfare are also confirmed. Next to global graph structural properties we also explore the effects of local and individual factors. We find that behavior on networks is affected by the number of (direct) neighbors, but not by individualsʼ risk attitudes. Apparently, the global and the local structure of a network does not leave much explanatory room for individual effects that pertain to risk taking.

Suggested Citation

  • Rosenkranz, Stephanie & Weitzel, Utz, 2012. "Network structure and strategic investments: An experimental analysis," Games and Economic Behavior, Elsevier, vol. 75(2), pages 898-920.
  • Handle: RePEc:eee:gamebe:v:75:y:2012:i:2:p:898-920
    DOI: 10.1016/j.geb.2012.02.003
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    More about this item

    Keywords

    Social networks; Experiment; Coordination; Strategic substitutes; Risk aversion;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D00 - Microeconomics - - General - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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