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A strategic model for network formation

Author

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  • Atabati, Omid
  • Farzad, Babak

Abstract

We study the dynamics of a game-theoretic network formation model that yields large-scale small-world networks. So far, mostly stochastic frameworks have been utilized to explain the emergence of these networks. On the other hand, it is natural to seek for game-theoretic network formation models in which links are formed due to strategic behaviors of individuals, rather than based on probabilities. Inspired by Even-Dar and Kearns' model [8], we consider a more realistic framework in which the cost of establishing each link is dynamically determined during the course of the game. Moreover, players are allowed to put transfer payments on the formation and maintenance of links. Also, they must pay a maintenance cost to sustain their direct links during the game. We show that there is a small diameter of at most 4 in the general set of equilibrium networks in our model. We achieved an economic mechanism and its dynamic process for individuals which firstly; unlike the earlier model, the outcomes of players' interactions or the equilibrium networks are guaranteed to exist. Furthermore, these networks coincide with the outcome of pairwise Nash equilibrium in network formation. Secondly; it generates large-scale networks that have a rational and strategic microfoundation and demonstrate the main characterization of small degree of separation in real-life social networks. Furthermore, we provide a network formation simulation that generates small-world networks.

Suggested Citation

  • Atabati, Omid & Farzad, Babak, 2014. "A strategic model for network formation," MPRA Paper 62529, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:62529
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    File URL: https://mpra.ub.uni-muenchen.de/62529/1/MPRA_paper_62529.pdf
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    References listed on IDEAS

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    1. de Martí, Joan & Zenou, Yves, 2009. "Social Networks," IZA Discussion Papers 4621, Institute of Labor Economics (IZA).
    2. Antoni Calvó-Armengol & Eleonora Patacchini & Yves Zenou, 2009. "Peer Effects and Social Networks in Education," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1239-1267.
    3. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, 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. Subhadip Chakrabarti & Robert Gilles, 2007. "Network potentials," Review of Economic Design, Springer;Society for Economic Design, vol. 11(1), pages 13-52, June.
    6. Jackson, Matthew O. & Watts, Alison, 2002. "The Evolution of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 106(2), pages 265-295, October.
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    Cited by:

    1. Atabati, Omid & Farzad, Babak, 2015. "A hierarchical network formation model," MPRA Paper 62551, University Library of Munich, Germany.

    More about this item

    Keywords

    network formation; linking game with transfer payments; pairwise stability; pairwise Nash equilibrium; small-world phenomenon;

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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