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Nash Networks with Heterogeneous Agents

A non-cooperative model of network formation is developed. Agents form links with others based on the cost of the link and its assessed benefit. Link formation is one-sided, i.e., agents can initiate links with other agents with- out their consent, provided the agent forming the link makes the appropriate investment. Information flw is two-way. The model builds on the work of Bala and Goyal, but allows for agent heterogeneity. Whereas they permit links to fail with a certain common probability, in our model the probability of failure can be different for different links. We investigate Nash networks that exhibit connectedness and super-connectedness. We provide an explicit characterization of certain star networks. Efficiency and Pareto-optimality issues are discussed through examples. We explore alternative model specifications to address potential shortcomings.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2003-06.

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Handle: RePEc:lsu:lsuwpp:2003-06
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  1. Gilles, R.P. & Sarangi, S., 2003. "The Role of Trust in Costly Network Formation," Discussion Paper 2003-53, Tilburg University, Center for Economic Research.
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  13. Borm, P.E.M. & van den Nouweland, C.G.A.M. & Tijs, S.H., 1994. "Cooperation and communication restrictions : A survey," Other publications TiSEM 513999f5-0c87-4204-a1ff-9, Tilburg University, School of Economics and Management.
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