Optimism leads to optimality: Ambiguity in network formation

Ani Guerdjikova and Peter Bayer ()

No 22-1289, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We analyze a model of endogenous two-sided network formation where players are affected by uncertainty in their opponents’ decisions. We model this uncertainty using the notion of equilibrium under ambiguity. Unlike the set of Nash equilibria, the set of equilibria under ambiguity does not always include underconnected and thus inefficient networks such as the empty network. On the other hand, it may include networks with unreciprocated, one-way links, which comes with an efficiency loss as linking efforts are costly. We characterize equilibria under ambiguity and provide conditions under which increased player optimism comes with an increase in connectivity and realized benefits in equilibrium. Next, we analyze network realignment under a myopic updating process with optimistic shocks, and derive a global stability condition of efficient networks. Under this condition, called ‘aligned preferences’, a subset of the Pareto optimal equilibrium networks is reached, specifically, networks that maximize the players’ total benefits of connections.

Date: 2022-01-21
New Economics Papers: this item is included in nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.tse-fr.eu/sites/default/files/TSE/docu ... 2022/wp_tse_1289.pdf Full Text (application/pdf)

Related works:
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2022)
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:126502

Access Statistics for this paper

More papers in TSE Working Papers from Toulouse School of Economics (TSE) Contact information at EDIRC.
Bibliographic data for series maintained by ().