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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
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Department of Economics, Brown University, Providence, RI 02912

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