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Limited farsightedness in network formation

  • KIRCHSTEIGER, Georg

    ()

    (Université Libre de Bruxelles, ECARES, B-1050 Brussels, Belgium)

  • MANTOVANI, Marco

    ()

    (Università degli studi di Milano, I-20122 Milano, Italy)

  • MAULEON, Ana

    ()

    (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium)

  • VANNETELBOSCH, Vincent

    ()

    (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium)

Pairwise stability Jackson and Wolinsky [1996] is the standard stability concept in network formation. It assumes myopic behavior of the agents in the sense that they do not forecast how others might react to their actions. Assuming that agents are perfectly farsighted, related stability concepts have been proposed. We design a simple network formation experiment to test these extreme theories, but find evidence against both of them: the subjects are consistent with an intermediate rule of behavior, which we interpret as a form of limited farsightedness. On aggregate, the selection among multiple pairwise stable networks (and the performance of farsighted stability) crucially depends on the level of farsightedness needed to sustain them, and not on efficiency or cooperative considerations. Individual behavior analysis corroborates this interpretation, and suggests, in general, a low level of farsightedness (around two steps) on the part of the agents.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013033.

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Date of creation: 09 Jul 2013
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Handle: RePEc:cor:louvco:2013033
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