Formation of Networks in a Context with Diversity

Alvaro Dominguez, Erik Darpoe and Maria Martin-Rodriguez

No 2023-02, AGI Working Paper Series from Asian Growth Research Institute

Abstract: We present a model analyzing the endogenous network formation prior to an infinite-horizon network bargaining game. We assume agents of two types with either one of two alternatives: connections among players of the same type are cheaper than among players of different type or vice versa. In this way, players not only need to consider the trade-off between more outside options and the costs of maintaining those additional links, but also what type of players they connect to. We characterize pairwise stable network structures through necessary and sufficient conditions, highlighting the role played by the way in which heterogeneous nodes are placed in the different components for the pairwise stability of the networks. Finally, we perform a welfare analysis, comparing the efficient structures with those that are stable.

Keywords: Bargaining; Heterogeneity; Network formation (search for similar items in EconPapers)
JEL-codes: C72 C78 D85 (search for similar items in EconPapers)
Date: 2023-02
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