Network Formation with Publicly Noxious but Privately Profitable Agents: An Experiment

Antonio Cabrales, Gema Pomares, Ramos Muñoz, David and Sánchez, Angel

No 19933, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study experimentally a new model to study the effect of climate externalities and contractual incompleteness on network formation. We model a network where good/green firms enjoy direct and indirect benefits from linking with one another. Bad/brown firms benefit from having a connection with a good firm, but they are a cost to both direct and indirect connections. In efficient networks the green firms should form large connected components with very few brown firms attached. The equilibrium networks, on the other hand, have many more brown firms attached, and components are also smaller than the efficient ones. Our experiments show that empirical results are broadly in line with the theoretical equilibrium predictions, although the precise quantitative outcomes are different from the theory.

Keywords: Network; formation (search for similar items in EconPapers)
JEL-codes: C92 D62 D85 Q54 (search for similar items in EconPapers)
Date: 2025-02
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