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In Search of Stars: Network Formation among Heterogeneous Agents

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  • Ule, Aljaz
  • Goeree, Jacob K.
  • Riedl, Arno

Abstract

This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the Bala-Goyal (2000) model of network formation with decay and two-way flow of benefits by allowing for agents with lower linking costs or higher benefits to others. Furthermore, agents' types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a "star" structure. With homogeneous agents, equilibrium predictions fail completely. In contrast, with heterogeneous agents stars frequently occur, often with the high-value or low-cost agent in the center. Stars are not born but rather develop: with a high-value agent, the network's centrality, stability, and efficiency all increase over time. Probit estimations based on best-response behaviour and other-regarding preferences are used to analyze individual linking behavior. Our results suggest that heterogeneity is a major determinant for the predominance of star-like structures in real-life social networks.

Suggested Citation

  • Ule, Aljaz & Goeree, Jacob K. & Riedl, Arno, 2007. "In Search of Stars: Network Formation among Heterogeneous Agents," Coalition Theory Network Working Papers 9099, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemct:9099
    DOI: 10.22004/ag.econ.9099
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    More about this item

    Keywords

    Institutional and Behavioral Economics;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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