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Endogenous Network Formation in the Laboratory

Author

Listed:
  • Bogachan Celen

    (Columbia GSB)

  • Kyle Hyndman

    () (SMU)

Abstract

This paper provides an experimental test of a theory of endogenous network forma- tion. A group of subjects face a decision problem under uncertainty. The subjects are endowed with a private information about the fundamentals of the problem, and they are supposed to make a decision one after the other. The key feature of the experiment is that a subject can observe the decisions of the preceding subjects by forming links. A link is costly, yet it enables a subject to observe previous decisions of those to whom he is linked. We show that subjects respond to changes in the information structure and the cost of link formation in the expected manner. However, we also show that behavior systematically deviates from the Bayesian benchmark as subjects form more links than theory predicts. Subjects also exhibit a tendency to conform rather than follow their own information. In order to explain this pattern, we provide an econo- metric model that posits that subjects care about their relative standing in the group. We show that the modified model provides a better fit than a standard QRE.

Suggested Citation

  • Bogachan Celen & Kyle Hyndman, 2007. "Endogenous Network Formation in the Laboratory," Departmental Working Papers 0701, Southern Methodist University, Department of Economics.
  • Handle: RePEc:smu:ecowpa:0701
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    File URL: ftp://ftp1.economics.smu.edu/WorkingPapers/2007/Hyndman/CH.pdf
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    References listed on IDEAS

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    Cited by:

    1. Eliaz, Kfir & Schotter, Andrew, 2010. "Paying for confidence: An experimental study of the demand for non-instrumental information," Games and Economic Behavior, Elsevier, vol. 70(2), pages 304-324, November.
    2. Di Cagno, Daniela & Sciubba, Emanuela, 2010. "Trust, trustworthiness and social networks: Playing a trust game when networks are formed in the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 156-167, August.

    More about this item

    Keywords

    Social learning; social interaction; networks; network formation.;

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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