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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. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  2. Licun Xue, 1998. "Coalitional stability under perfect foresight," Economic Theory, Springer, vol. 11(3), pages 603-627.
  3. TERCIEUX, Olivier & VANNETELBOSCH, Vincent, 2004. "A characterization of stochastically stable networks," CORE Discussion Papers 2004056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Ana Mauleon & Vincent Vannetelbosch, 2003. "Farsightedness and Cautiousness in Coalition Formation," Working Papers 2003.52, Fondazione Eni Enrico Mattei.
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  7. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
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  10. 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).
  11. HERINGS, Jean-Jacques & MAULEON, Ana & ANNETELBOSCH, Vincent J., . "Rationalizability for social environments," CORE Discussion Papers RP -1718, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Carrillo, Juan D & Gaduh, Arya, 2012. "The Strategic Formation of Networks: Experimental Evidence," CEPR Discussion Papers 8757, C.E.P.R. Discussion Papers.
  13. Bhaskar Dutta & Sayantan Ghosal & Debraj Ray, 2004. "Farsighted Network Formation," Working papers 122, Centre for Development Economics, Delhi School of Economics.
  14. 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.
  15. 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.
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