Optimism leads to optimality: Ambiguity in network formation

Peter Bayer and Ani Guerdjikova

Journal of Economic Dynamics and Control, 2024, vol. 168, issue C

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: Ambiguity; Network formation; Optimism (search for similar items in EconPapers)
JEL-codes: C72 D81 D85 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188924001362
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2024)
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2022)
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2022)
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2021)
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:eee:dyncon:v:168:y:2024:i:c:s0165188924001362

DOI: 10.1016/j.jedc.2024.104944

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().