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Limited farsightedness in network formation

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  • 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)

Abstract

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.

Suggested Citation

  • KIRCHSTEIGER, Georg & MANTOVANI, Marco & MAULEON, Ana & VANNETELBOSCH, Vincent, 2013. "Limited farsightedness in network formation," CORE Discussion Papers 2013033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2013033
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    References listed on IDEAS

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    Cited by:

    1. Pietro Battiston, 2016. "Constrained Network Formation," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 2(3), pages 347-362, November.
    2. Offerman, Theo & Schram, Arthur & Van Leeuwen, Boris, 2014. "Competition for status creates superstars: An experiment on public good provision and network formation," IAST Working Papers 14-16, Institute for Advanced Study in Toulouse (IAST).
    3. Michael Caldara & Michael McBride, 2014. "An Experimental Study of Network Formation with Limited Observation," Working Papers 141501, University of California-Irvine, Department of Economics.
    4. Margherita Comola & Marcel Fafchamps, 2015. "An Experimental Study of Decentralized Link Formation with Competition," NBER Working Papers 21758, National Bureau of Economic Research, Inc.
    5. Herings, P.J.J. & Mauleon, A. & Vannetelbosch, V., 2014. "Stability of networks under level-k farsightedness," Research Memorandum 030, Maastricht University, Graduate School of Business and Economics (GSBE).

    More about this item

    Keywords

    network formation; experiment; myopic and farsighted stability;

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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