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Peer Effects in Endogenous Networks

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  • Timo Hiller
  • Timo Hiller

Abstract

This paper presents a simple model of strategic network formation with local complementarities in effort levels and positive local externalities for a general class of payoff functions. Results are obtained for one-sided and two-sided link creation. In both cases (pairwise) Nash equilibrium networks are nested split graphs, which are a strict subset of core-periphery networks. The relevance of the convexity of the value function (gross payoffs as a function of neighbours' effort levels when best responding) in obtaining nested split graphs is highlighted. Under additional assumptions on payoffs, we show that the only efficient networks are the complete and the empty network. Furthermore, there exists a range of linking cost such that any (pairwise) Nash equilibrium is inefficient and for a strict subset of this range any (pairwise) Nash equilibrium network structure is different from the efficient network. These findings are relevant for a wide range of social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms.

Suggested Citation

  • Timo Hiller & Timo Hiller, 2013. "Peer Effects in Endogenous Networks," STICERD - Theoretical Economics Paper Series 564, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stitep:564
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    File URL: https://sticerd.lse.ac.uk/dps/te/te564.pdf
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    References listed on IDEAS

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    Cited by:

    1. ,, 2015. "Social activity and network formation," Theoretical Economics, Econometric Society, vol. 10(2), May.
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    3. Bernard Herskovic & João Ramos, 2020. "Acquiring Information through Peers," American Economic Review, American Economic Association, vol. 110(7), pages 2128-2152, July.

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    Keywords

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    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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