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Network formation with heterogeneous agents and absolute friction

Listed author(s):
  • J. VANDENBOSSCHE

    ()

  • T. DEMUYNCK
  • -

We present a model of endogenous network formation with absolute friction and heterogeneous agents. The individual payoffs from a given network are determined by the difference of an agent specific utility function that depends on the number of his/her direct links and the sum of his/her link-costs. These link-costs decompose in a symmetric function that represents the social and geographical distance between the two agents and an agent specific function representing the partner’s wealth and status. From a theoretical point of view, we define a new stability concept that is situated between the notions of pairwise stability (see Jackson and Wolinsky (1996)) and strong stability (see Dutta and Mutuswami (1997)). We show that our model has a unique stable network and we demonstrate that it is also strongly stable. As such, we provide uniqueness and existence for a whole range of stability concepts situated between our new stability concept and strong stability. From a practical point of view, we provide an algorithm that reproduces this stable network from information on the individual payoff structure. We illustrate the use of this algorithm by applying it to an informal insurance data set from the village of Nyakatoke in rural Tanzania.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 10/642.

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Length: 27 pages
Date of creation: Feb 2010
Handle: RePEc:rug:rugwps:10/642
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  1. Frank H. Page & Myrna H. Wooders, 2009. "Endogenous Network Dynamics," Working Papers 2009.28, Fondazione Eni Enrico Mattei.
  2. De Weerdt, Joachim & Dercon, Stefan, 2006. "Risk-sharing networks and insurance against illness," Journal of Development Economics, Elsevier, vol. 81(2), pages 337-356, December.
  3. Page, Frank Jr. & Wooders, Myrna H. & Kamat, Samir, 2005. "Networks and farsighted stability," Journal of Economic Theory, Elsevier, vol. 120(2), pages 257-269, February.
  4. Slikker, Marco & van den Nouweland, Anne, 2001. "A One-Stage Model of Link Formation and Payoff Division," Games and Economic Behavior, Elsevier, vol. 34(1), pages 153-175, January.
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  7. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
  8. Page Jr., Frank H. & Wooders, Myrna, 2009. "Strategic basins of attraction, the path dominance core, and network formation games," Games and Economic Behavior, Elsevier, vol. 66(1), pages 462-487, May.
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  10. Stef Tijs & Anne van den Nouweland & Bhaskar Dutta, 1998. "Link formation in cooperative situations," International Journal of Game Theory, Springer;Game Theory Society, vol. 27(2), pages 245-256.
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  13. Paul Belleflamme & Francis Bloch, 2004. "Market sharing agreements and collusive networks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 387-411, 05.
  14. Jackson, Matthew O., 2005. "Allocation rules for network games," Games and Economic Behavior, Elsevier, vol. 51(1), pages 128-154, April.
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  18. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
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  21. Fafchamps, Marcel & Lund, Susan, 2003. "Risk-sharing networks in rural Philippines," Journal of Development Economics, Elsevier, vol. 71(2), pages 261-287, August.
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  28. repec:dau:papers:123456789/4392 is not listed on IDEAS
  29. Watts, Alison, 2002. "Non-myopic formation of circle networks," Economics Letters, Elsevier, vol. 74(2), pages 277-282, January.
  30. Dutta, Bhaskar & Mutuswami, Suresh, 1997. "Stable Networks," Journal of Economic Theory, Elsevier, vol. 76(2), pages 322-344, October.
    • Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
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  38. COMOLA Margherita, 2007. "The network structure of informal arrangements : evidence from rural Tanzania," Research Unit Working Papers 0708, Laboratoire d'Economie Appliquee, INRA.
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