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Volume of Trade and Dynamic Network Formation in Two-Sided Economies

We study the long-run stability of trade networks in a two-sided economy of agents labelled men and women. Each agent desires relationships with the other type, but having multiple partners is costly. This cost-bene?t trade-o¤ results in each agent having a single-peaked utility over the number of partners?the volume of trade?, the peak being greater for men than for women. We propose a stochastic matching process in which self-interested agents form and sever links over time. Links can be added or deleted, sometimes simultaneously by a single agent. While the unperturbed process yields each pairwise stable network as an absorbing state, stochastic stability in two perturbed processes provides a signi?cant re?nement, leading respectively to egalitarian and anti-egalitarian pairwise stable networks. This has implications for the concentration on each side of the market of a random information shock. The analysis captures stylized facts, related to market fragmentation, concentration and contagion asymmetry, in several two-sided economies.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2013-6.

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Date of creation: 2013
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Handle: RePEc:bro:econwp:2013-6
Contact details of provider: Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Alvin E. Roth, 2006. "Repugnance as a Constraint on Markets," Levine's Bibliography 321307000000000629, UCLA Department of Economics.
  2. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
  3. Pongou, Roland & Serrano, Roberto, 2013. "Fidelity Networks and Long-Run Trends in HIV/AIDS Gender Gaps," MPRA Paper 47232, University Library of Munich, Germany, revised 30 Sep 2014.
  4. Roth, Alvin E & Vande Vate, John H, 1990. "Random Paths to Stability in Two-Sided Matching," Econometrica, Econometric Society, vol. 58(6), pages 1475-80, November.
  5. Mathias Staudigl, 2010. "Potential games in volatile environments," Vienna Economics Papers 1002, University of Vienna, Department of Economics.
  6. Feri, Francesco, 2007. "Stochastic stability in networks with decay," Journal of Economic Theory, Elsevier, vol. 135(1), pages 442-457, July.
  7. Dutta, B. & van den Nouweland, C.G.A.M. & Tijs, S.H., 1995. "Link formation in cooperative situations," Discussion Paper 1995-35, Tilburg University, Center for Economic Research.
  8. Roland Pongou & Roberto Serrano, 2009. "A Dynamic Theory of Fidelity Networks with an Application to the Spread of HIV/AIDS," Working Papers 2009-2, Brown University, Department of Economics.
  9. Slikker, M. & van den Nouweland, C.G.A.M., 1997. "A One-Stage Model of Link Formation and Payoff Division," Discussion Paper 1997-23, Tilburg University, Center for Economic Research.
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