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A Strategic Model of Social and Economic Networks

  • Jackson, Matthew O.
  • Wolinsky, Asher

We study the stability and efficiency of social and economic networks, when self-interested individuals have the discretion to form or sever links. First, in the context of two stylized models, we characterize the sets of stable networkds (immune to incentives to form or sever links) and the sets of efficient networks (those which maximize total production or utility). The sets of stable networks and efficients networks do not always intersect. Next, we show that this tension is not unique to these models, but persists generally. In order to assure that there is always at least one efficient graph which is stable, one is forced to allocate resources to nodes (players) who are not responsible for any of the production. We characterize another rule which fails to assure that efficient graphs are stable, but arises naturally if the allocations result from the bargaining of players.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 71 (1996)
Issue (Month): 1 (October)
Pages: 44-74

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Handle: RePEc:eee:jetheo:v:71:y:1996:i:1:p:44-74
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. van den Nouweland, Anne & Borm, Peter, 1991. "On the Convexity of Communication Games," International Journal of Game Theory, Springer, vol. 19(4), pages 421-30.
  2. Kirman, Alan P & Oddou, Claude & Weber, Shlomo, 1986. "Stochastic Communication and Coalition Formation," Econometrica, Econometric Society, vol. 54(1), pages 129-38, January.
  3. Dutta, B. & van den Nouweland, C.G.A.M. & Tijs, S.H., 2003. "Link formation in cooperative situations," Other publications TiSEM 840ac1d0-9e23-41a7-832e-8, Tilburg University, School of Economics and Management.
  4. van den Nouweland, C.G.A.M. & Borm, P.E.M., 1991. "On the convexity of communication games," Other publications TiSEM e754cb6a-f695-4099-bfbf-c, Tilburg University, School of Economics and Management.
  5. Lars Stole & Jeffrey Zwiebel, 1993. "Organizational Design and Technology Choice with Nonbinding Contracts," Game Theory and Information 9310001, EconWPA, revised 13 Oct 1993.
  6. Hendricks, Ken & Piccione, Michele & Tan, Guofu, 1995. "The Economics of Hubs: The Case of Monopoly," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 83-99, January.
  7. Horn, Henrik & Wolinsky, Asher, 1988. "Worker Substitutability and Patterns of Unionisation," Economic Journal, Royal Economic Society, vol. 98(391), pages 484-97, June.
  8. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-60, March.
  9. Roth, Alvin E. & Sotomayor, Marilda, 1992. "Two-sided matching," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 16, pages 485-541 Elsevier.
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