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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
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Web page: http://www.ugent.be/eb

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  1. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
  2. Jackson, Matthew O. & van den Nouweland, Anne, 2002. "Strongly Stable Networks," Working Papers 1147, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Matthew O. Jackson, 2003. "Allocation Rules for Network Games," Working Papers 2003.51, Fondazione Eni Enrico Mattei.
  4. Watts, Alison, 2002. "Non-myopic formation of circle networks," Economics Letters, Elsevier, vol. 74(2), pages 277-282, January.
  5. HERINGS, Jean-Jacques & MAULEON, Ana & VANNETELBOSCH, Vincent, . "Farsightedly stable networks," CORE Discussion Papers RP -2171, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Robert P. Gilles & Cathleen Johnson, 2000. "original papers : Spatial social networks," Review of Economic Design, Springer, vol. 5(3), pages 273-299.
  7. 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.
  8. Marcel Fafchamps & Margherita Comola, 2009. "Testing Unilateral and Bilateral Link Formation," Economics Series Working Papers CSAE WPS/2009-13, University of Oxford, Department of Economics.
  9. 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.
  10. 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.
  11. Matthew O. Jackson & Brian W. Rogers, 2005. "The Economics of Small Worlds," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 617-627, 04/05.
  12. Stefan Dercon & Joachim De Weerdt, 2002. "Risk-sharing Networks and Insurance against illness," Economics Series Working Papers WPS/2002-16, University of Oxford, Department of Economics.
  13. 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.
  14. 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.
  15. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  16. 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.
  17. Jan K. Brueckner, 2006. "Friendship Networks," Journal of Regional Science, Wiley Blackwell, vol. 46(5), pages 847-865.
  18. Frank H. Page, Jr. & Myrna H. Wooders, 2006. "Strategic Basins of Attraction, the Path Dominance Core, and Network Formation Games," Vanderbilt University Department of Economics Working Papers 0614, Vanderbilt University Department of Economics.
  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. TERCIEUX, Olivier & VANNETELBOSCH, Vincent, . "A characterization of stochastically stable networks," CORE Discussion Papers RP -1877, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  21. 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, School of Economics and Management.
  22. Feri, Francesco, 2007. "Stochastic stability in networks with decay," Journal of Economic Theory, Elsevier, vol. 135(1), pages 442-457, July.
  23. Haller, Hans & Sarangi, Sudipta, 2005. "Nash networks with heterogeneous links," Mathematical Social Sciences, Elsevier, vol. 50(2), pages 181-201, September.
  24. Venkatesh Bala & Sanjeev Goyal, 2000. "original papers : A strategic analysis of network reliability," Review of Economic Design, Springer, vol. 5(3), pages 205-228.
  25. Calvo-Armengol, Antoni, 2004. "Job contact networks," Journal of Economic Theory, Elsevier, vol. 115(1), pages 191-206, March.
  26. Fafchamps, Marcel & Gubert, Flore, 2007. "The formation of risk sharing networks," Journal of Development Economics, Elsevier, vol. 83(2), pages 326-350, July.
  27. Deroian, Frederic, 2003. "Farsighted strategies in the formation of a communication network," Economics Letters, Elsevier, vol. 80(3), pages 343-349, September.
  28. Frank H. Page, Jr. & Myrna H. Wooders, 2009. "Endogenous Network Dynamics," Caepr Working Papers 2009-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  29. 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).
  30. Galeotti, Andrea & Goyal, Sanjeev & Kamphorst, Jurjen, 2006. "Network formation with heterogeneous players," Games and Economic Behavior, Elsevier, vol. 54(2), pages 353-372, February.
  31. Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
  32. Sanjeev Goyal & Sumit Joshi, 2006. "Unequal connections," International Journal of Game Theory, Springer, vol. 34(3), pages 319-349, October.
  33. Fafchamps, Marcel & Lund, Susan, 2003. "Risk-sharing networks in rural Philippines," Journal of Development Economics, Elsevier, vol. 71(2), pages 261-287, August.
  34. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
  35. repec:ner:tilbur:urn:nbn:nl:ui:12-77112 is not listed on IDEAS
  36. 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.
  37. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
  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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