Network Formation and Social Coordination

Sanjeev Goyal and Fernando Vega-Redondo
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Fernando Vega-Redondo: Universidad de Alicante; Universitat Pompeu Fabra

No 481, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: This paper develops a simple model to examine the interaction between partner choice and individual behavior in games of coordination. An important ingredient of our approach is the way we model partner choice: we suppose that a player can establish ties with other players by unilaterally investing in costly pair-wise links. In this context, individual efforts to balance the costs and benefits of links are shown to lead to a unique equilibrium interaction architecture. The dynamics of network formation, however, has powerful effects on individual behavior: if costs of forming links are below a certain threshold then players coordinate on the risk-dominant action, while if costs are above this threshold then they coordinate on the efficient action. These findings are robust to a variety of modifications in the link formation process. For example, it may be posited that, in order for a link to materialize, the link proposal must be two-sided (i.e. put forward by both agents); or that, in case of a unilateral proposal, the link may be refused by the other party (if, say, the latter's net payoff is negative); or that a pair of agents can play the game even if connected only through indirect links.

Keywords: Networks; Links; Coordination games; Equilibrium selection; Risk dominance; Efficiency (search for similar items in EconPapers)
JEL-codes: C7 D6 (search for similar items in EconPapers)
Date: 2003-01-01
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Citations: View citations in EconPapers (3)

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Journal Article: Network formation and social coordination (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:481

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