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Games on Networks: Direct Complements and Indirect Substitutes

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  • Sergio Currarini
  • Elena Fumagalli,
  • Fabrizio Panebianco

Abstract

We study linear quadratic games played on a network where strategies are complements between neighbors and substitutes between agents at distance-two. We provide micro-founded problems where this pattern of interaction is due to a local congestion effect. Equilibrium behavior systematically differs from a model of peer effects only. First, the ranking of equilibrium actions may not follow that of network centralities, with large behavior prevailing at the periphery of the network. Second, network density affects aggregate behavior in a non-monotonic way. Third, segregating agents according to their preferences has a non-monotonic effect on the polarization of behavior. We relate these patterns to evidence from smoking networks, industrial districts and ethnically fragmented societies. We conclude by discussing the implications for the identification of peer effects.

Suggested Citation

  • Sergio Currarini & Elena Fumagalli, & Fabrizio Panebianco, 2014. "Games on Networks: Direct Complements and Indirect Substitutes," Discussion Papers in Economics 14/13, Division of Economics, School of Business, University of Leicester.
  • Handle: RePEc:lec:leecon:14/13
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    Cited by:

    1. Sergio Currarini & Carmen Marchiori & Alessandro Tavoni, 2016. "Network Economics and the Environment: Insights and Perspectives," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(1), pages 159-189, September.

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    More about this item

    Keywords

    Games on Networks; Peer Effects; Key-player; Centrality; Congestion.;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • I1 - Health, Education, and Welfare - - Health
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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