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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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    2. Boris van Leeuwen & Theo Offerman & Arthur Schram, 2013. "Superstars need Social Benefits: An Experiment on Network Formation," Tinbergen Institute Discussion Papers 13-112/I, Tinbergen Institute.
    3. Boosey, Luke & Mark Isaac, R., 2016. "Asymmetric network monitoring and punishment in public goods experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 132(PA), pages 26-41.
    4. Gary Charness & Francesco Feri & Miguel A. Meléndez‐Jiménez & Matthias Sutter, 2014. "Experimental Games on Networks: Underpinnings of Behavior and Equilibrium Selection," Econometrica, Econometric Society, vol. 82, pages 1615-1670, September.
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    16. Syngjoo Choi & Edoardo Gallo & Shachar Kariv, 2015. "Networks in the laboratory," Cambridge Working Papers in Economics 1551, Faculty of Economics, University of Cambridge.
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    18. Sanjeev Goyal & Stephanie Rosenkranz & Utz Weitzel & Vincent Buskens, 2014. "Individual Search and Social Networks," Working Papers 2014.49, Fondazione Eni Enrico Mattei.

    More about this item

    Keywords

    Social networks; Experiment; Coordination; Strategic substitutes; Risk aversion;

    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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