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Endogenous Network Dynamics

  • Frank H. Page

    (Indiana University)

  • Myrna H. Wooders

    (University of Warwick)

In all social and economic interactions, individuals or coalitions choose not only with whom to interact but how to interact, and over time both the structure (the “with whom”) and the strategy (“the how”) of interactions change. Our objectives here are to model the structure and strategy of interactions prevailing at any point in time as a directed network and to address the following open question in the theory of social and economic network formation: given the rules of network and coalition formation, the preferences of individuals over networks, the strategic behavior of coalitions in forming networks, and the trembles of nature, what network and coalitional dynamics are likely to emerge and persist. Our main contributions are (i) to formulate the problem of network and coalition formation as a dynamic, stochastic game, (ii) to show that this game possesses a stationary correlated equilibrium (in network and coalition formation strategies), (iii) to show that, together with the trembles of nature, this stationary correlated equilibrium determines an equilibrium Markov process of network and coalition formation, and (iv) to show that this endogenous process possesses a finite, nonempty set of ergodic measures, and generates a finite, disjoint collection of nonempty subsets of networks and coalitions, each constituting a basin of attraction. We also extend to the setting of endogenous Markov dynamics the notions of pairwise stability (Jackson-Wolinsky, 1996), strong stability (Jacksonvan den Nouweland, 2005), and Nash stability (Bala-Goyal, 2000), and we show that in order for any network-coalition pair to persist and be stable (pairwise, strong, or Nash) it is necessary and sufficient that the pair reside in one of finitely many basins of attraction. The results we obtain here for endogenous network dynamics and stochastic basins of attraction are the dynamic analogs of our earlier results on endogenous network formation and strategic basins of attraction in static, abstract games of network formation (Page and Wooders, 2008), and build on the seminal contributions of Jackson and Watts (2002), Konishi and Ray (2003), and Dutta, Ghosal, and Ray (2005).

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.28.

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Date of creation: May 2009
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Handle: RePEc:fem:femwpa:2009.28
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  1. 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.
  2. Amir, Rabah & Lambson, Val E., 2003. "Entry, exit, and imperfect competition in the long run," Journal of Economic Theory, Elsevier, vol. 110(1), pages 191-203, May.
  3. Page Jr., Frank H. & Wooders, Myrna, 2009. "Strategic basins of attraction, the path dominance core, and network formation games," Games and Economic Behavior, Elsevier, vol. 66(1), pages 462-487, May.
  4. Costa, O.L.V. & Dufour, F., 2005. "On the ergodic decomposition for a class of Markov chains," Stochastic Processes and their Applications, Elsevier, vol. 115(3), pages 401-415, March.
  5. Matthew O. Jackson, 2001. "Strongly Stable Networks," University of Oregon Economics Department Working Papers 2001-3, University of Oregon Economics Department, revised 15 Nov 2002.
  6. Samir Kamat & Frank Page & Myrna Wooders, 2004. "Networks and Farsighted Stability," Econometric Society 2004 North American Winter Meetings 561, Econometric Society.
  7. MERTENS, Jean-François & PARTHASARATHY, T., . "Equilibria for discounted stochastic games," CORE Discussion Papers RP -1666, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Bhaskar Dutta & Sayantan Ghosal & Debraj Ray, 2004. "Farsighted Network Formation," Working papers 122, Centre for Development Economics, Delhi School of Economics.
  9. MERTENS, Jean-François, . "Stochastic games," CORE Discussion Papers RP -1587, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Amir, Rabah, 1996. "Continuous Stochastic Games of Capital Accumulation with Convex Transitions," Games and Economic Behavior, Elsevier, vol. 15(2), pages 111-131, August.
  11. Tweedie, R. L., 2001. "Drift conditions and invariant measures for Markov chains," Stochastic Processes and their Applications, Elsevier, vol. 92(2), pages 345-354, April.
  12. Frank H. Page, Jr. & Myrna H. Wooders, 2005. "Strategic Basins of Attraction, the Farsighted Core, and Network Formation Games," Vanderbilt University Department of Economics Working Papers 0509, Vanderbilt University Department of Economics.
  13. Andrzej Nowak, 2007. "On stochastic games in economics," Mathematical Methods of Operations Research, Springer, vol. 66(3), pages 513-530, December.
  14. 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.
  15. Konishi, Hideo & Ray, Debraj, 2003. "Coalition formation as a dynamic process," Journal of Economic Theory, Elsevier, vol. 110(1), pages 1-41, May.
  16. repec:spr:compst:v:66:y:2007:i:3:p:513-530 is not listed on IDEAS
  17. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  18. Page Jr., Frank H. & Wooders, Myrna, 2007. "Networks and clubs," Journal of Economic Behavior & Organization, Elsevier, vol. 64(3-4), pages 406-425.
  19. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  20. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
  21. Herings, P. Jean-Jacques & Peeters, Ronald J. A. P., 2004. "Stationary equilibria in stochastic games: structure, selection, and computation," Journal of Economic Theory, Elsevier, vol. 118(1), pages 32-60, September.
  22. Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-81, July.
  23. Chakrabarti, Subir K., 1999. "Markov Equilibria in Discounted Stochastic Games," Journal of Economic Theory, Elsevier, vol. 85(2), pages 294-327, April.
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