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A Dynamic Model of Network Formation with Strategic Interactions

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  • König, Michael
  • Tessone, Claudio J.
  • Zenou, Yves

Abstract

In order to understand the different characteristics observed in real-world networks, one needs to analyze how and why networks form, the impact of network structure on agents' outcomes, and the evolution of networks over time. For this purpose, we combine a network game introduced by Ballester et al. (2006), where the Nash equilibrium action of each agent is proportional to her Bonacich centrality, with an endogenous network formation process. Links are formed on the basis of agents' centrality while the network is exposed to a volatile environment introducing interruptions in the connections between agents. A remarkable feature of our dynamic network formation process is that, at each period of time, the network is a nested split graph. This graph has very nice mathematical properties and are relatively easy to characterize. We show that there exists a unique stationary network (which is a nested split graph) whose topological properties completely match features exhibited by real-world networks. We also find that there exists a sharp transition in efficiency and network density from highly centralized to decentralized networks.

Suggested Citation

  • König, Michael & Tessone, Claudio J. & Zenou, Yves, 2009. "A Dynamic Model of Network Formation with Strategic Interactions," CEPR Discussion Papers 7521, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7521
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    Citations

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    Cited by:

    1. de Marti, Joan & Zenou, Yves, 2009. "Social Networks," Working Paper Series 816, Research Institute of Industrial Economics.
    2. repec:wsi:acsxxx:v:13:y:2010:i:04:n:s0219525910002700 is not listed on IDEAS
    3. Michael D. König & Claudio J. Tessone & Yves Zenou, 2010. "From Assortative To Dissortative Networks: The Role Of Capacity Constraints," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 483-499.
    4. Zenou, Yves & König, Michael D. & Tessone, Claudio J., 2014. "Nestedness in networks: A theoretical model and some applications," Theoretical Economics, Econometric Society, vol. 9(3), September.
    5. Azomahou, T. & Opolot, D., 2014. "Beliefs dynamics in communication networks," MERIT Working Papers 034, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    6. Somayeh Koohborfardhaghighi & Jorn Altmann, 2016. "How Network Visibility and Strategic Networking Leads to the Emergence of Certain Network Characteristics: A Complex Adaptive System Approach," TEMEP Discussion Papers 2016130, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Aug 2016.
    7. König, Michael David, 2016. "The formation of networks with local spillovers and limited observability," Theoretical Economics, Econometric Society, vol. 11(3), September.
    8. Somayeh Koohborfardhaghighi & Jorn Altmann, 2016. "How Strategic Networking Impacts the Networking Outcome: A Complex Adaptive System Approach," TEMEP Discussion Papers 2016131, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Aug 2016.
    9. Marco Pelliccia, 2015. "Bargaining in Global Communication Networks," Birkbeck Working Papers in Economics and Finance 1507, Birkbeck, Department of Economics, Mathematics & Statistics.

    More about this item

    Keywords

    Bonacich centrality; nested split graphs; network formation; social interactions;

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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