Core-stability over networks with widespread externalities

László Á. Kóczy ()
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László Á. Kóczy: Institute of Economics, Centre for Economic and Regional Studies, Tóth Kálmán u. 4., H-1097 Budapest, Hungary and Department of Finance, Faculty of Economic and Social Sciences, Budapest University of Technology and Economics, Magyar tudósok körútja 2., H-1111 Budapest, Hungary

No 2026, KRTK-KTI WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: The Covid-19 epidemic highlighted the significance of externalities: contacts with other people do not only affect our chances of getting infected but also our entire network. We introduce a model for coalitional network stability in networks with widespread externalities. The network function form generalises the partition function form of cooperative games in allowing the network structure to be taken into account. The recursive core for network function form games generalises the recursive core for such environments and its properties also rhyme with the corresponding inclusion properties of the optimistic and pessimistic recursive cores and can be seen as a modification of pairwise stability to a coalitional setting where the involvement of more players allows for the -- partial -- internalisation of the externalities, but we also allow residual players to endogenously respond to any externalities that may affect them. We present two simple examples to illustrate positive and negative externalities. The first is of a favour network and show that the core is nonempty when players must pay transfers to intermediaries; this simple setting also models economic situations such as airline networks. The second models social contacts during an epidemic and finds social bubbles as the solution.

Keywords: externalities; networks; recursive core; social bubble (search for similar items in EconPapers)
JEL-codes: C71 C72 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020-06
New Economics Papers: this item is included in nep-des, nep-gth, nep-net and nep-ore
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