It's all about Connections: Evidence on Network Formation

Armin Falk and Michael Kosfeld

No 777, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We present an economic experiment on network formation, in which subjects can decide to form links to one another. Direct links are costly but being connected is valuable. The gametheoretic basis for our experiment is the model of Bala and Goyal (2000). They distinguish between two scenarios regarding the flow of benefits through a network, the so-called 1-way and 2-way flow model. Our main results show that the prediction based on Nash and strict Nash equilibrium works well in the 1-way flow model but fails largely in the 2-way flow model. We observe a strong learning dynamic in the 1-way flow model but less so in the 2-way flow model. Finally, costs of a direct link have a positive impact on the occurrence of (strict) Nash networks in the 1-way flow model but a negative impact in the 2-way flow model. In our discussion on possible explanations for these results we focus on strategic asymmetry and asymmetry with respect to payoffs. We find that the latter asymmetry, i.e., payoff inequity, plays an important role in the network formation process.

Keywords: coordination; experiments; network formation; fairness (search for similar items in EconPapers)
JEL-codes: C72 C92 D63 Z13 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2003-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

Published - published in: Review of Network Economics: 2012, 11 (3), Article 2

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Journal Article: It's all about Connections: Evidence on Network Formation (2012)
Working Paper: It's All About Connections: Evidence on Network Formation (2003)
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