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The Formation of Networks with Side Payments

Author

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  • Francis Bloch
  • Matt Jackson

Abstract

We examine the formation of networks among a set of players whose payoffs depend on the structure of the network. We focus on games where players may promise or demand transfer payments when forming links. If players may only make such transfers on the links they are directly involved with, then there are many settings where inefficient networks are the only equilibrium outcomes, and we fully characterize the supportable networks. If externalities are nonpositive and a convexity condition is satisfied, then efficient networks are supportable as equilibria with such direct transfers. If players can also make positive transfers to pay for links they are not involved with, then a convexity condition alone is sufficient for an efficient network to be supportable as an equilibrium. In cases where transfers can be made contingent on the network, then any efficient network is supportable as an equilibrium. We also consider a refinement of equilibrium that allows pairs of players to coordinate their promises and demands on a link. If players can make payments to prevent the formation of a link as well as to form it, then all efficient networks are supportable via the pairwise equilibrium refinement

Suggested Citation

  • Francis Bloch & Matt Jackson, 2004. "The Formation of Networks with Side Payments," Econometric Society 2004 North American Summer Meetings 198, Econometric Society.
  • Handle: RePEc:ecm:nasm04:198
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    File URL: http://repec.org/esNASM04/up.11741.1075192145.pdf
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    References listed on IDEAS

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    1. Page, Frank Jr. & Wooders, Myrna H. & Kamat, Samir, 2005. "Networks and farsighted stability," Journal of Economic Theory, Elsevier, vol. 120(2), pages 257-269, February.
    2. Slikker, Marco & van den Nouweland, Anne, 2001. "A One-Stage Model of Link Formation and Payoff Division," Games and Economic Behavior, Elsevier, vol. 34(1), pages 153-175, January.
    3. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
    4. Dutta, Bhaskar & Mutuswami, Suresh, 1997. "Stable Networks," Journal of Economic Theory, Elsevier, vol. 76(2), pages 322-344, October.
      • Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
    5. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    6. Mutuswami, Suresh & Winter, Eyal, 2002. "Subscription Mechanisms for Network Formation," Journal of Economic Theory, Elsevier, vol. 106(2), pages 242-264, October.
    7. Roger B. Myerson, 1976. "Graphs and Cooperation in Games," Discussion Papers 246, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    More about this item

    Keywords

    network formation; side-payments;

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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