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Strategic Random Networks

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Abstract

To study how economic fundamentals affect the formation of social networks, a model is needed that (i) has agents responding rationally to incentives (ii) can be taken to the data. This paper combines game-theoretic and statistical approaches to network formation in order to develop such a model. Agents spend costly resources to socialize. Their effort levels determine the probabilities of relationships, which are valuable for their direct benefits and also because they lead to other relationships in a second stage of “meeting friends of friends”. The model predicts random graphs with tunable degree distributions and clustering, and characterizes how those statistics depend on the economic fundamentals. When the value of friends-of-friends is low, equilibrium networks can be either sparse or thick. But as soon as this value crosses a key threshold, the sparse equilibrium disappears completely and only densely connected networks are possible. This transition mitigates an extreme inefficiency.

Suggested Citation

  • Ben Golub & Yair Livne, 2010. "Strategic Random Networks," Working Papers 10-21, NET Institute.
  • Handle: RePEc:net:wpaper:1021
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    File URL: http://www.netinst.org/Golub_Livne_10-21.pdf
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    References listed on IDEAS

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    1. Edward L. Glaeser & Bruce Sacerdote & José A. Scheinkman, 1996. "Crime and Social Interactions," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 507-548.
    2. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
    3. Esther Duflo & Emmanuel Saez, 2003. "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 118(3), pages 815-842.
    4. Mark Granovetter, 2005. "The Impact of Social Structure on Economic Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 33-50, Winter.
    5. Moulin, Herve, 1994. "Social choice," Handbook of Game Theory with Economic Applications,in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 31, pages 1091-1125 Elsevier.
    6. Cabrales, Antonio & Calvó-Armengol, Antoni & Zenou, Yves, 2011. "Social interactions and spillovers," Games and Economic Behavior, Elsevier, vol. 72(2), pages 339-360, June.
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    More about this item

    Keywords

    network formation; random graphs; random networks; phase transition;

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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