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

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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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    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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