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Network Structure in a Link-formation Game: An Experimental Study

Listed author(s):
  • Alexander Elbittar
  • Rodrigo Harrison
  • Roberto Muñoz

type="main" xml:id="ecin12106-abs-0001"> In this article, we use an experiment to evaluate the performance of alternative refinements in a Myersonian link formation game with a supermodular payoff function. Our results show that a non-cooperative refinement, the global games (GG) approach, outperforms alternative cooperative refinements (strong Nash equilibrium, coalition-proof Nash equilibrium, and pairwise stable Nash equilibrium) in explaining the observed experimental behavior in the static game of complete information with three players. The results are robust to some comparative statics and the GG approach shows a high predictive power under incomplete information. However, under repeated interaction or with a greater number of players, the GG approach loses predictive power, but so do the cooperative refinements. The results illustrate the importance of coordination failure in practice and the need to design mechanisms to reduce this effect in practical decision-making problems. (JEL C70, C92, D20, D44, D82)

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 122247000000001708.

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Date of creation: 19 Nov 2007
Handle: RePEc:cla:levarc:122247000000001708
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  1. Jackson, Matthew O. & van den Nouweland, Anne, 2005. "Strongly stable networks," Games and Economic Behavior, Elsevier, vol. 51(2), pages 420-444, May.
  2. Matthew O. Jackson, 2002. "The Stability and Efficiency of Economic and Social Networks," Microeconomics 0211011, EconWPA.
  3. Fafchamps, Marcel & Lund, Susan, 2003. "Risk-sharing networks in rural Philippines," Journal of Development Economics, Elsevier, vol. 71(2), pages 261-287, August.
  4. Falk Armin & Kosfeld Michael, 2012. "It's all about Connections: Evidence on Network Formation," Review of Network Economics, De Gruyter, vol. 11(3), pages 1-36, September.
  5. Stef Tijs & Anne van den Nouweland & Bhaskar Dutta, 1998. "Link formation in cooperative situations," International Journal of Game Theory, Springer;Game Theory Society, vol. 27(2), pages 245-256.
  6. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 1-44, January.
  7. Antonio Cabrales & Rosemarie Nagel & Roc Armenter, 2007. "Equilibrium selection through incomplete information in coordination games: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 221-234, September.
  8. Dutta, Bhaskar & Mutuswami, Suresh, 1997. "Stable Networks," Journal of Economic Theory, Elsevier, vol. 76(2), pages 322-344, October.
    • Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Rodrigo Harrison & Roberto Muñoz, 2008. "Stability and equilibrium selection in a link formation game," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(2), pages 335-345, November.
  10. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  11. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2004. "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica, Econometric Society, vol. 72(5), pages 1583-1599, 09.
  12. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  13. Matthew O. Jackson, 2003. "A survey of models of network formation: Stability and efficiency," Working Papers 1161, California Institute of Technology, Division of the Humanities and Social Sciences.
  14. Cary Deck & Cathleen Johnson, 2004. "Link bidding in laboratory networks," Review of Economic Design, Springer;Society for Economic Design, vol. 8(4), pages 359-372, 04.
  15. (*), Anne van den Nouweland & Marco Slikker, 2000. "original papers : Network formation models with costs for establishing links," Review of Economic Design, Springer;Society for Economic Design, vol. 5(3), pages 333-362.
  16. Callander, Steven & Plott, Charles R., 2005. "Principles of network development and evolution: an experimental study," Journal of Public Economics, Elsevier, vol. 89(8), pages 1469-1495, August.
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