Dynamic network formation with foresighted agents

Yangbo Song () and Mihaela Schaar ()
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Yangbo Song: The Chinese University of Hong Kong (Shenzhen)
Mihaela Schaar: University of Oxford

International Journal of Game Theory, 2020, vol. 49, issue 2, No 1, 345-384

Abstract: Abstract What networks can form and persist when agents are self-interested? Can such networks be efficient? A substantial theoretical literature predicts that various networks emerge randomly and efficiency is unlikely to be sustained, but these predictions are in stark contrast to empirical findings. In this paper, we present a new model of network formation. In contrast to the existing literature, we assume that agents are foresighted (rather than myopic) and have some but not necessarily all information about the history. We provide a tight characterization of the sustainable networks; in particular, efficient networks can form and persist if they provide every agent a strictly positive payoff. Our results are robust to model variations, while evidence from empirical networks suggests a modest improvement in prediction by our model compared with models with agent myopia.

Keywords: Network formation; Foresight; Efficiency (search for similar items in EconPapers)
JEL-codes: A14 C72 D62 D83 D85 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00182-020-00714-4

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