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Connections models with diminishing marginal rate of substitution link-formation technologies

Author

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  • Olaizola, Norma
  • Valenciano, Federico

Abstract

We study a connections model where the strength of a link depends on the amounts invested in it by the two nodes and is determined by a concave function non decreasing in both arguments, which is specific for each pair of nodes and possibly non-symmetric. The revenue from investments in links is the value (information, contacts, friendship) that the nodes receive through the network. First, assuming that links are the result of investments by the node-players involved, we characterize a notion of marginal equilibrium, where all nodes play locally best responses, and identify different marginally stable structures. This notion is based on weak assumptions about node-players’ information, but is necessary for Nash equilibrium and for a notion of pairwise stability suitable in this setting. Based on this, different sufficient conditions for Nash or pairwise stability of certain structures are established. Second, efficient networks are characterized for homogeneous technological profiles.

Suggested Citation

  • Olaizola, Norma & Valenciano, Federico, 2026. "Connections models with diminishing marginal rate of substitution link-formation technologies," Research in Economics, Elsevier, vol. 80(2).
    • Handle: RePEc:eee:reecon:v:80:y:2026:i:2:s1090944326000189
    DOI: 10.1016/j.rie.2026.101130
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    References listed on IDEAS

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    1. Norma Olaizola & Federico Valenciano, 2023. "A connections model with decreasing returns link-formation technology," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 14(1), pages 31-61, March.
    2. Billand, Pascal & Bravard, Christophe & Sarangi, Sudipta, 2012. "Existence of Nash networks and partner heterogeneity," Mathematical Social Sciences, Elsevier, vol. 64(2), pages 152-158.
    3. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    4. Olaizola, By Norma & Valenciano, Federico, 2021. "Efficiency and stability in the connections model with heterogeneous nodes," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 490-503.
    5. Pascal Billand & Christophe Bravard & Sudipta Sarangi, 2012. "On the interaction between heterogeneity and decay in two-way flow models," Theory and Decision, Springer, vol. 73(4), pages 525-538, October.
    6. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
    7. Bloch, Francis & Dutta, Bhaskar, 2009. "Communication networks with endogenous link strength," Games and Economic Behavior, Elsevier, vol. 66(1), pages 39-56, May.
    8. Norma Olaizola & Federico Valenciano, 2025. "Efficiency and Hierarchy in Networks Connecting Heterogeneous Nodes with Heterogeneous Links," Networks and Spatial Economics, Springer, vol. 25(4), pages 907-933, December.
    9. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
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    Keywords

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    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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