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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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File URL: http://wps-feb.ugent.be/Papers/wp_10_642.pdf
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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. Dutta, B. & van den Nouweland, C.G.A.M. & Tijs, S.H., 2003. "Link formation in cooperative situations," Other publications TiSEM 840ac1d0-9e23-41a7-832e-8, Tilburg University, School of Economics and Management.
  2. Bala, V. & Goyal, S., 1997. "Self-Organization in Communication Networks," Econometric Institute Research Papers EI 9713-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  3. Robert P. Gilles & Cathleen Johnson, 2000. "original papers : Spatial social networks," Review of Economic Design, Springer;Society for Economic Design, vol. 5(3), pages 273-299.
  4. ELLEFLAMME, Paul & BLOCH, Francis, "undated". "Market sharing agreements and collusive networks," CORE Discussion Papers RP 1711, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  7. Marcel Fafchamps & Susan Lund, 2000. "Risk-Sharing Networks in Rural Philippines," Economics Series Working Papers 10, University of Oxford, Department of Economics.
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  11. 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.
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  13. Stefan Dercon & Joachim de Weerdt, 2004. "Risk-Sharing Networks And Insurance Against Illness," Development and Comp Systems 0409019, EconWPA.
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  17. Galeotti, Andrea & Goyal, Sanjeev & Kamphorst, Jurjen, 2006. "Network formation with heterogeneous players," Games and Economic Behavior, Elsevier, vol. 54(2), pages 353-372, February.
  18. Matthew O. Jackson & Anne van den Nouweland, 2002. "Strongly Stable Networks," Microeconomics 0211006, EconWPA.
  19. Frank H. Page Jr. & Myrna H. Wooders & Samir Kamat, 2002. "Networks and Farsighted Stability," Computing in Economics and Finance 2002 370, Society for Computational Economics.
  20. Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
  21. Bloch, Francis & Jackson, Matthew, 2004. "The Formation of Networks with Transfers among Players," Working Papers 1194, California Institute of Technology, Division of the Humanities and Social Sciences.
  22. Frank Page & Myrna Wooders, 2007. "Strategic Basins of Attraction, the Path Dominance Core, and Network Formation Games," Caepr Working Papers 2007-020, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  23. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  24. Jan K. Brueckner, 2006. "Friendship Networks," Journal of Regional Science, Wiley Blackwell, vol. 46(5), pages 847-865.
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  33. 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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  35. Nicolas Carayol & Pascale Roux, 2006. "A strategic model of complex networks formation," Working Papers of BETA 2006-02, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  36. Haller, Hans & Sarangi, Sudipta, 2005. "Nash networks with heterogeneous links," Mathematical Social Sciences, Elsevier, vol. 50(2), pages 181-201, September.
  37. Watts, Alison, 2002. "Non-myopic formation of circle networks," Economics Letters, Elsevier, vol. 74(2), pages 277-282, January.
  38. Venkatesh Bala & Sanjeev Goyal, 2000. "original papers : A strategic analysis of network reliability," Review of Economic Design, Springer;Society for Economic Design, vol. 5(3), pages 205-228.
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