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Under-connected and over-connected networks: the role of externalities in strategic network formation

  • Berno Buechel

    ()

  • Tim Hellmann

    ()

Since the seminal contribution of Jackson & Wolinsky 1996 [A Strategic Model of Social and Economic Networks, JET 71, 44-74] it has been widely acknowledged that the formation of social networks exhibits a general conflict between individual strategic behavior and collective outcome. What has not been studied systematically are the sources of inefficiency. We approach this gap by analyzing the role of positive and negative externalities of link formation. We find general results that relate situations of positive externalities with stable networks that cannot be "too dense" in a well-defined sense, while situations with negative externalities, tend to induce "too dense" networks.

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File URL: http://hdl.handle.net/10.1007/s10058-012-0114-x
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Article provided by Springer in its journal Review of Economic Design.

Volume (Year): 16 (2012)
Issue (Month): 1 (March)
Pages: 71-87

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Handle: RePEc:spr:reecde:v:16:y:2012:i:1:p:71-87
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  1. Sanjeev Goyal & Sumit Joshi, 2006. "Bilateralism And Free Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 749-778, 08.
  2. Berno Buechel & Tim Hellmann, 2012. "Under-connected and over-connected networks: the role of externalities in strategic network formation," Review of Economic Design, Springer, vol. 16(1), pages 71-87, March.
  3. Francis Bloch & Matthew Jackson, 2006. "Definitions of equilibrium in network formation games," International Journal of Game Theory, Springer, vol. 34(3), pages 305-318, October.
  4. Subhadip Chakrabarti & Robert Gilles, 2007. "Network potentials," Review of Economic Design, Springer, vol. 11(1), pages 13-52, June.
  5. Paul Belleflamme & Francis Bloch, 2004. "Market sharing agreements and collusive networks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 387-411, 05.
  6. Jackson, Matthew O. & van den Nouweland, Anne, 2005. "Strongly stable networks," Games and Economic Behavior, Elsevier, vol. 51(2), pages 420-444, May.
  7. Tim Hellmann, 2009. "Convexity and Complementarity in Network Formation: Implications for the Structure of Pairwise Stable Networks," Center for Mathematical Economics Working Papers 423, Center for Mathematical Economics, Bielefeld University.
  8. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Goyal, Sanjeev & Vega-Redondo, Fernando, 2007. "Structural holes in social networks," Journal of Economic Theory, Elsevier, vol. 137(1), pages 460-492, November.
  10. Bloch, Francis & Jackson, Matthew, 2004. "The Formation of Networks with Transfers among Players," Working Papers 1194, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Bloch, Francis & Dutta, Bhaskar, 2005. "Communication Networks with Endogenous Link Strength," The Warwick Economics Research Paper Series (TWERPS) 723, University of Warwick, Department of Economics.
  12. Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  13. Berno Buechel, 2007. "Network formation with closeness incentives," Center for Mathematical Economics Working Papers 395, Center for Mathematical Economics, Bielefeld University.
  14. Kosfeld Michael, 2004. "Economic Networks in the Laboratory: A Survey," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-23, March.
  15. Sanjeev Goyal & Sumit Joshi, 2006. "Unequal connections," International Journal of Game Theory, Springer, vol. 34(3), pages 319-349, October.
  16. Antoni Calvó-Armengol & Rahmi Ilkiliç, 2005. "Pairwise-Stability and Nash Equilibria in Network Formation," Working Papers 2005.34, Fondazione Eni Enrico Mattei.
  17. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  18. repec:rne:rneart:v:3:y:2004:i:1:p:19-41 is not listed on IDEAS
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