In Seach of Stars
We study the endogenous formation of networks in a controlled experiment. Subjects derive benefits from being linked to others and incur costs for links they make. The theoretically predicted network has a "star"-type architecture, with "periphery" subjects linking to a unique "center". This asymmetric outcome, in terms of actions and payoffs, does not arise in completely symmetric environments. When benefits and linking costs vary across subjects, however, stars emerge and observed networks are close to efficient. This finding accords with the observation that stars in real life often have uniquely defining characteristics, which alleviates coordination problems and reduces fairness concerns.
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