Network Formation through Mechanism Design

Bo Cowgill and Zikai Xu ()
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Zikai Xu: Department of Economics, Columbia University, New York, NY, USA

No 25-01, Working Papers from NET Institute

Abstract: This paper develops a mechanism design approach to network formation. A principal has a willingness-to-pay (WTP) for different network configurations while agents have preferences over their network positions. Our approach allows the principal to optimize for global properties of the network, while respecting IC/IR constraints of network participants. We focus on direct mechanisms but develop a broader family of mechanisms in which transfers are set by the allocation rule ("revenue equivalence"). We characterize optimal mechanisms under novel multidimensional regularity conditions and provide an ironing procedure for irregular distributions. These findings contribute to multidimensional mechanism design, with potential applications to network formation in social, economic, and organizational contexts.

Keywords: mechanism design; virtual values; network formation (search for similar items in EconPapers)
JEL-codes: D2 D44 D82 D85 D86 L14 M5 (search for similar items in EconPapers)
Pages: 88 pages
Date: 2025-08
New Economics Papers: this item is included in nep-des, nep-gth, nep-mic and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:net:wpaper:2501

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