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Network Formation and Social Coordination

  • Sanjeev Goyal

    (Queen Mary, University of London)

  • Fernando Vega-Redondo

    (Universidad de Alicante; Universitat Pompeu Fabra)

This paper develops a simple model to examine the interaction between partner choice and individual behavior in games of coordination. An important ingredient of our approach is the way we model partner choice: we suppose that a player can establish ties with other players by unilaterally investing in costly pair-wise links. In this context, individual efforts to balance the costs and benefits of links are shown to lead to a unique equilibrium interaction architecture. The dynamics of network formation, however, has powerful effects on individual behavior: if costs of forming links are below a certain threshold then players coordinate on the risk-dominant action, while if costs are above this threshold then they coordinate on the efficient action. These findings are robust to a variety of modifications in the link formation process. For example, it may be posited that, in order for a link to materialize, the link proposal must be two-sided (i.e. put forward by both agents); or that, in case of a unilateral proposal, the link may be refused by the other party (if, say, the latter's net payoff is negative); or that a pair of agents can play the game even if connected only through indirect links.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp481.pdf
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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 481.

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Date of creation: Jan 2003
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Handle: RePEc:qmw:qmwecw:wp481
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