Optimism leads to optimality: Ambiguity in network formation

Péter Bayer and Ani Guerdjikova ()
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Péter Bayer: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Ani Guerdjikova: GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes

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Abstract: We analyze a model of endogenous two-sided network formation where players are affected by uncertainty about their opponents' decisions. We model this uncertainty using the notion of equilibrium under ambiguity as in Eichberger and Kelsey (2014). 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 in the sense of Kandori et al. (1993). Under this condition, a subset of the Pareto optimal equilibrium networks is reached, specifically, networks that maximize the players' total benefits of connections.

Keywords: Pessimism; Optimism; Pareto-optimality; Equilibrium selection; Ambiguity; Network formation (search for similar items in EconPapers)
Date: 2024-08-22
New Economics Papers: this item is included in nep-mic
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Published in Journal of Economic Dynamics and Control, 2024, 168, pp.104944. ⟨10.1016/j.jedc.2024.104944⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03005107

DOI: 10.1016/j.jedc.2024.104944

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