Shadow links

Manuel Foerster, Ana Mauleon and Vincent Vannetelbosch
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Vincent Vannetelbosch: Université catholique de Louvain, LIDAM/CORE, Belgium

No 3171, LIDAM Reprints CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We propose a framework of network formation where players can form two types of links: public links observed by everyone and shadow links generally not observed by others. We introduce a novel solution concept called rationalizable conjectural pairwise stability, which generalizes Jackson and Wolinsky (1996)'s pairwise stability notion to accommodate shadow links. We first show that a network is stable if there exist beliefs such that each player conjectures to be in a network that is stable under correct beliefs, and in which she does not want to alter her links unilaterally. We then derive a mechanism to construct a stable network that is not stable under correct beliefs. Third, we establish that the set of stable networks is shrinking in the players' observation radius. Finally, we illustrate our framework in the context of two specific models and show that players may over(under)estimate others' connections and hence under(over)connect.

Keywords: Network formation; Private information; Shadow links; Stability; Rationalizability (search for similar items in EconPapers)
JEL-codes: A14 C70 D82 D85 (search for similar items in EconPapers)
Pages: 25
Date: 2021-08-03
Note: In: Journal of Economic Theory, 2021, vol. 197, 105325
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Journal Article: Shadow links (2021)
Working Paper: Shadow links (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvrp:3171

DOI: 10.1016/j.jet.2021.105325

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