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Making Friends Meet: Network Formation with Introductions

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  • Jan-Peter Siedlarek

Abstract

This paper proposes a parsimonious model of network formation with introductions in the presence of intermediation rents. Introductions allow two nodes to form a new connection on favorable terms with the help of a common neighbor. The decision to form links via introductions is subject to a trade-off between the gains from having a direct connection at lower cost and the potential losses for the introducer from lower intermediation rents. When nodes take advantage of introductions, stable networks tend to exhibit a minimum amount of clustering. At the same time, intermediary nodes have incentives to protect their position, and stable networks can exhibit nodes exploiting structural holes, that is, bridges across otherwise unconnected parts of the network earning intermediation rents.

Suggested Citation

  • Jan-Peter Siedlarek, 2020. "Making Friends Meet: Network Formation with Introductions," Working Papers 20-01R2, Federal Reserve Bank of Cleveland, revised 28 Jun 2022.
    • Handle: RePEc:fip:fedcwq:87371
    DOI: 10.26509/frbc-wp-202001r2
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    References listed on IDEAS

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    1. Christophe Bravard & Sudipta Sarangi & PHILIPP MÖHLMEIER & AGNIESZKA RUSINOWSKA & EMILY TANIMURA, 2016. "A Degree-Distance-Based Connections Model with Negative and Positive Externalities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(2), pages 168-192, April.
    2. Sergio Currarini & Massimo Morelli, 2000. "original papers : Network formation with sequential demands," Review of Economic Design, Springer;Society for Economic Design, vol. 5(3), pages 229-249.
    3. Vega-Redondo,Fernando, 2007. "Complex Social Networks," Cambridge Books, Cambridge University Press, number 9780521857406, October.
    4. Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
    5. Sanjeev Goyal & Marco J. van der Leij & José Luis Moraga-Gonzalez, 2006. "Economics: An Emerging Small World," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 403-432, April.
    6. Jan-Peter Siedlarek, 2012. "Intermediation in Networks," Working Papers 2012.42, Fondazione Eni Enrico Mattei.
    7. Vega-Redondo,Fernando, 2007. "Complex Social Networks," Cambridge Books, Cambridge University Press, number 9780521674096, October.
    8. Mayer, Adalbert & Puller, Steven L., 2008. "The old boy (and girl) network: Social network formation on university campuses," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 329-347, February.
    9. Matthew O. Jackson & Brian W. Rogers, 2007. "Meeting Strangers and Friends of Friends: How Random Are Social Networks?," American Economic Review, American Economic Association, vol. 97(3), pages 890-915, June.
    10. Goyal, Sanjeev & Vega-Redondo, Fernando, 2007. "Structural holes in social networks," Journal of Economic Theory, Elsevier, vol. 137(1), pages 460-492, November.
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    Cited by:

    1. in 't Veld, Daan & van der Leij, Marco & Hommes, Cars, 2020. "The formation of a core-periphery structure in heterogeneous financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    2. in 't Veld, Daan & van der Leij, Marco & Hommes, Cars, 2020. "The formation of a core-periphery structure in heterogeneous financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    intermediation; introductions; network formation; networks; clustering; structural holes;
    All these keywords.

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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