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Formation of Networks in a Context with Diversity

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  • Darpö, Erik
  • Domínguez, Alvaro
  • Martín-Rodríguez, María

Abstract

We present a model analyzing the endogenous network formation prior to an infinite-horizon network bargaining game. We assume agents of two types with either one of two alternatives: connections among players of the same type are cheaper than among players of different type or vice versa. In this way, players not only need to consider the trade-off between more outside options and the costs of maintaining those additional links, but also what type of players they connect to. We characterize pairwise stable network structures through necessary and sufficient conditions, highlighting the role played by the way in which heterogeneous nodes are placed in the different components for the pairwise stability of the networks. Finally, we perform a welfare analysis, comparing the efficient structures with those that are stable.

Suggested Citation

  • Darpö, Erik & Domínguez, Alvaro & Martín-Rodríguez, María, 2023. "Formation of Networks in a Context with Diversity," AGI Working Paper Series 2023-02, Asian Growth Research Institute.
    • Handle: RePEc:agi:wpaper:00000260
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    References listed on IDEAS

    as
    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. 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.
    3. Corominas-Bosch, Margarida, 2004. "Bargaining in a network of buyers and sellers," Journal of Economic Theory, Elsevier, vol. 115(1), pages 35-77, March.
    4. Abreu, Dilip & Manea, Mihai, 2012. "Bargaining and efficiency in networks," Journal of Economic Theory, Elsevier, vol. 147(1), pages 43-70.
    5. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-1150, September.
    6. Gauer, F. & Hellmann, T., 2017. "Strategic formation of homogeneous bargaining networks," Games and Economic Behavior, Elsevier, vol. 106(C), pages 51-74.
    7. Polanski, Arnold, 2007. "Bilateral bargaining in networks," Journal of Economic Theory, Elsevier, vol. 134(1), pages 557-565, May.
    8. Abreu, Dilip & Manea, Mihai, 2012. "Markov equilibria in a model of bargaining in networks," Games and Economic Behavior, Elsevier, vol. 75(1), pages 1-16.
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    More about this item

    Keywords

    Bargaining; Heterogeneity; Network formation; C72; C78; D85;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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