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Network formation with heterogeneous agents and absolute friction

  • 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
Date of revision:
Handle: RePEc:rug:rugwps:10/642
Contact details of provider: Postal: Hoveniersberg 4, B-9000 Gent
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Web page: http://www.ugent.be/eb

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  1. Venkatesh Bala & Sanjeev Goyal, 2000. "original papers : A strategic analysis of network reliability," Review of Economic Design, Springer, vol. 5(3), pages 205-228.
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  3. Matthew O. Jackson, 2001. "Strongly Stable Networks," University of Oregon Economics Department Working Papers 2001-3, University of Oregon Economics Department, revised 15 Nov 2002.
  4. Samir Kamat & Frank Page & Myrna Wooders, 2004. "Networks and Farsighted Stability," Econometric Society 2004 North American Winter Meetings 561, Econometric Society.
  5. Dutta, Bhaskar & Mutuswami, Suresh, 1997. "Stable Networks," Journal of Economic Theory, Elsevier, vol. 76(2), pages 322-344, October.
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  6. Matthew O. Jackson & Francis Bloch, 2004. "The Formation of Networks with Transfers among Players," Working Papers 2004.80, Fondazione Eni Enrico Mattei.
  7. Herings P. Jean-Jacques & Mauleon Ana & Vannetelbosch Vincent, 2006. "Farsightedly Stable Networks," Research Memorandum 041, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. 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.
  9. Dutta, B. & van den Nouweland, C.G.A.M. & Tijs, S.H., 1998. "Link formation in cooperative situations," Other publications TiSEM fb302bdf-f6ab-4909-99d5-5, Tilburg University, School of Economics and Management.
  10. Marcel Fafchamps & Susan Lund, 2000. "Risk-Sharing Networks in Rural Philippines," Economics Series Working Papers 10, University of Oxford, Department of Economics.
  11. Calvo-Armengol, Antoni, 2004. "Job contact networks," Journal of Economic Theory, Elsevier, vol. 115(1), pages 191-206, March.
  12. 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.
  13. Jan K. Brueckner, 2004. "Friendship Networks," Econometric Society 2004 North American Winter Meetings 184, Econometric Society.
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  16. repec:ner:tilbur:urn:nbn:nl:ui:12-77112 is not listed on IDEAS
  17. Matthew O. Jackson & Brian W. Rogers, 2005. "The Economics of Small Worlds," Game Theory and Information 0503004, EconWPA.
  18. Slikker, M. & van den Nouweland, C.G.A.M., 1997. "A One-Stage Model of Link Formation and Payoff Division," Discussion Paper 1997-23, Tilburg University, Center for Economic Research.
  19. Marcel Fafchamps & Flore Gubert, 2005. "The Formation of Risk Sharing Networks," Economics Series Working Papers GPRG-WPS-037, University of Oxford, Department of Economics.
  20. Haller, Hans & Sarangi, Sudipta, 2005. "Nash networks with heterogeneous links," Mathematical Social Sciences, Elsevier, vol. 50(2), pages 181-201, September.
  21. Bhaskar Dutta & Sayantan Ghosal & Debraj Ray, 2004. "Farsighted Network Formation," Working papers 122, Centre for Development Economics, Delhi School of Economics.
  22. TERCIEUX, Olivier & VANNETELBOSCH, Vincent, 2004. "A characterization of stochastically stable networks," CORE Discussion Papers 2004056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  23. Watts, Alison, 2002. "Non-myopic formation of circle networks," Economics Letters, Elsevier, vol. 74(2), pages 277-282, January.
  24. Feri, Francesco, 2007. "Stochastic stability in networks with decay," Journal of Economic Theory, Elsevier, vol. 135(1), pages 442-457, July.
  25. Deroian, Frederic, 2003. "Farsighted strategies in the formation of a communication network," Economics Letters, Elsevier, vol. 80(3), pages 343-349, September.
  26. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  27. Matthew O. Jackson, 2003. "Allocation Rules for Network Games," Working Papers 2003.51, Fondazione Eni Enrico Mattei.
  28. COMOLA Margherita, 2007. "The network structure of informal arrangements : evidence from rural Tanzania," Research Unit Working Papers 0708, Laboratoire d'Economie Appliquee, INRA.
  29. Robert P. Gilles & Cathleen Johnson, 2000. "original papers : Spatial social networks," Review of Economic Design, Springer, vol. 5(3), pages 273-299.
  30. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
  31. 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.
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  34. Galeotti, Andrea & Goyal, Sanjeev & Kamphorst, Jurjen, 2006. "Network formation with heterogeneous players," Games and Economic Behavior, Elsevier, vol. 54(2), pages 353-372, February.
  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. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  37. De Weerdt, Joachim, 2002. "Risk-Sharing and Endogenous Network Formation," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  38. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
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