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Experiments with Network Formation

  • Dean Corbae
  • John Duffy

We examine how groups of agents form trading networks in the presence of idiosyncratic risk and the possibility of contagion. Specifically, four agents play a two-stage finite repeated game. In the first stage, the network structure is endogenously determined through a non-cooperative proposal game. In the second stage, agents play multiple rounds of a coordination game against all of their chosen 'neighbors' after the realization of a payoff relevant shock. While parsimonious, our four agent environment is rich enough to capture all of the important interaction structures in the networks literature: bilateral (marriage), local interaction, star, and uniform matching. Consistent with our theory, marriage networks are the most frequent and stable network structures in our experiments. We find that payoff efficiency is around 90 percent of the ex ante, payoff dominant strategies and the distribution of network structures is significantly different from that which would result from random play.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 666156000000000319.

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Date of creation: 24 Oct 2003
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Handle: RePEc:cla:levarc:666156000000000319
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  10. 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.
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  24. John Duffy & Dean Corbae, 2006. "Technical and Data Appendix to `Experiments with Network Formation`," Working Papers 293, University of Pittsburgh, Department of Economics, revised Dec 2006.
  25. 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.
  26. Esther Hauk & Rosemarie Nagel, 2000. "Choice of partners in multiple two-person prisoner's dilemma games: An experimental study," Economics Working Papers 487, Department of Economics and Business, Universitat Pompeu Fabra.
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  28. Garratt, Rod, 2005. "Bank Runs: An Experimental Study," University of California at Santa Barbara, Economics Working Paper Series qt1rk2w7m4, Department of Economics, UC Santa Barbara.
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