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Stable and Efficient Networks with Farsighted Players: the Largest Consistent Set

  • A Bhattacharya

In this paper we study strategic formation of bilateral networks with farsighted players in the classic framework of Jackson and Wolinsky (1996). We use the largest consistent set (LCS)(Chwe (1994)) as the solution concept for stability. We show that there exists a value function such that for every component balanced and anonymous allocation rule, the corresponding LCS does not contain any strongly efficient network. Using Pareto efficiency, a weaker concept of efficiency, we get a more positive result. However, then also, at least one environment of networks (with a component balanced and anonymous allocation rule) exists for which the largest consistent set does not contain any Pareto efficient network. These confirm that the well-known problem of the incompatibility between the set of stable networks and the set of efficient networks persists even in the environment with farsighted players. Next we study some possibilities of resolving this incompatibility.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 09/34.

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Handle: RePEc:yor:yorken:09/34
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  1. Akihiro Suzuki & Shigeo Muto, 2005. "Farsighted Stability in an n-Person Prisoner’s Dilemma," International Journal of Game Theory, Springer;Game Theory Society, vol. 33(3), pages 431-445, 09.
  2. 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).
  3. Bhaskar Dutta & Sayantan Ghosal & Debraj Ray, 2004. "Farsighted Network Formation," Working papers 122, Centre for Development Economics, Delhi School of Economics.
  4. GANDJEAN, Gilles & MAULEON, Ana & VANNETELBOSCH, Vincent, 2009. "Connections among farsighted agents," CORE Discussion Papers 2009031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. 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.
  6. Francis Bloch & Bhaskar Dutta, 2008. "Communication networks with endogeneous link strength," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 08-15, Indian Statistical Institute, New Delhi, India.
  7. 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.
  8. 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.
  9. 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.
  10. Masuda, Takeshi, 2002. "Farsighted stability in average return games," Mathematical Social Sciences, Elsevier, vol. 44(2), pages 169-181, November.
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