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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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  1. Ana Mauleon & Vincent Vannetelbosch, 2003. "Farsightedness and Cautiousness in Coalition Formation," Working Papers 2003.52, Fondazione Eni Enrico Mattei.
  2. Armin Falk, Michael Kosfeld, . "It's all about Connections: Evidence on Network Formation," IEW - Working Papers 146, Institute for Empirical Research in Economics - University of Zurich.
  3. Olivier Tercieux & Vincent Vannetelbosch, 2006. "A characterization of stochastically stable networks," International Journal of Game Theory, Springer, vol. 34(3), pages 351-369, October.
  4. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  5. repec:cup:cbooks:9780521887427 is not listed on IDEAS
  6. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
  7. Herings, P. Jean-Jacques & Mauleon, Ana & Vannetelbosch, Vincent J., 2004. "Rationalizability for social environments," Games and Economic Behavior, Elsevier, vol. 49(1), pages 135-156, October.
  8. repec:cup:cbooks:9780521715348 is not listed on IDEAS
  9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  10. Carrillo, Juan D & Gaduh, Arya, 2012. "The Strategic Formation of Networks: Experimental Evidence," CEPR Discussion Papers 8757, C.E.P.R. Discussion Papers.
  11. Licun Xue, 1998. "Coalitional stability under perfect foresight," Economic Theory, Springer, vol. 11(3), pages 603-627.
  12. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin & Ott, Marion, 2012. "Forward-looking behavior in Hawk–Dove games in endogenous networks: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 75(1), pages 35-52.
  13. Duranton, Gilles & Martin, Philippe & Mayer, Thierry & Mayneris, Florian, 2010. "The Economics of Clusters: Lessons from the French Experience," OUP Catalogue, Oxford University Press, number 9780199592203, March.
  14. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
  15. CAULIER, Jean-François & MAULEON, Ana & VANNETELBOSCH, Vincent, 2013. "Allocation rules for coalitional network games," CORE Discussion Papers 2013032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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