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The Formation of Networks with Side Payments

  • Francis Bloch
  • Matt Jackson

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

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 198.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:198
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  1. Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Frank H. Page Jr. & Myrna H. Wooders & Samir Kamat, 2002. "Networks and Farsighted Stability," Computing in Economics and Finance 2002 370, Society for Computational Economics.
  3. MUTUSWAMI, Suresh & WINTER, Eyal, 2000. "Subscription mechanisms for network formation," CORE Discussion Papers 2000020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
  6. 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.
  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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