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Network Formation through Mechanism Design

Author

Listed:
  • Bo Cowgill

    (Columbia Business School, Columbia University, New York, NY, USA)

  • Zikai Xu

    (Department of Economics, Columbia University, New York, NY, USA)

Abstract

This paper develops a mechanism design approach to network formation. A principal has a willingness-to-pay (WTP) for different network configurations while agents have preferences over their network positions. Our approach allows the principal to optimize for global properties of the network, while respecting IC/IR constraints of network participants. We focus on direct mechanisms but develop a broader family of mechanisms in which transfers are set by the allocation rule ("revenue equivalence"). We characterize optimal mechanisms under novel multidimensional regularity conditions and provide an ironing procedure for irregular distributions. These findings contribute to multidimensional mechanism design, with potential applications to network formation in social, economic, and organizational contexts.

Suggested Citation

  • Bo Cowgill & Zikai Xu, 2025. "Network Formation through Mechanism Design," Working Papers 25-01, NET Institute.
    • Handle: RePEc:net:wpaper:2501
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    Keywords

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    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D2 - Microeconomics - - Production and Organizations
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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