Link investment substitutability: A factor influencing network formation

Sihua Ding

Games and Economic Behavior, 2022, vol. 136, issue C, 340-359

Abstract: Studies on network formation employ rather different assumptions on link formation and make different predictions. We propose a constant elasticity of substitution (CES) link formation specification that generalizes commonly used link formation assumptions and parametrizes a factor that could affect network formation, namely, link investment substitutability (LIS). We apply this approach to the model by Galeotti and Goyal (2010) that studies public good provision on an endogenously formed network and find that results on equilibria differ significantly depending on whether link investments are substitutes or complements. Additionally, when link investments are complements, we find that LIS governs the unequalness of equilibrium structures. We also explore how LIS influences the relationship between the public good provision of a player and her utility.

Keywords: Game theory; Network formation; Public good; Unequalness (search for similar items in EconPapers)
JEL-codes: C71 C72 D85 L14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:136:y:2022:i:c:p:340-359

DOI: 10.1016/j.geb.2022.10.001

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