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Network Formation with Publicly Noxious but Privately Profitable Agents: An Experiment

Author

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  • Cabrales, Antonio
  • Pomares, Gema
  • Ramos Muñoz, David
  • Sánchez, Angel

Abstract

We study experimentally a new model to study the effect of climate externalities and contractual incompleteness on network formation. We model a network where good/green firms enjoy direct and indirect benefits from linking with one another. Bad/brown firms benefit from having a connection with a good firm, but they are a cost to both direct and indirect connections. In efficient networks the green firms should form large connected components with very few brown firms attached. The equilibrium networks, on the other hand, have many more brown firms attached, and components are also smaller than the efficient ones. Our experiments show that empirical results are broadly in line with the theoretical equilibrium predictions, although the precise quantitative outcomes are different from the theory.

Suggested Citation

  • Cabrales, Antonio & Pomares, Gema & Ramos Muñoz, David & Sánchez, Angel, 2025. "Network Formation with Publicly Noxious but Privately Profitable Agents: An Experiment," CEPR Discussion Papers 19933, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19933
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    Keywords

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    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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