Endogenous Network Formation in the Laboratory

Boğaçhan Çelen () and Kyle Hyndman

No 701, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: This paper provides an experimental test of a theory of endogenous network forma- tion. A group of subjects face a decision problem under uncertainty. The subjects are endowed with a private information about the fundamentals of the problem, and they are supposed to make a decision one after the other. The key feature of the experiment is that a subject can observe the decisions of the preceding subjects by forming links. A link is costly, yet it enables a subject to observe previous decisions of those to whom he is linked. We show that subjects respond to changes in the information structure and the cost of link formation in the expected manner. However, we also show that behavior systematically deviates from the Bayesian benchmark as subjects form more links than theory predicts. Subjects also exhibit a tendency to conform rather than follow their own information. In order to explain this pattern, we provide an econo- metric model that posits that subjects care about their relative standing in the group. We show that the modified model provides a better fit than a standard QRE.

Keywords: Social learning; social interaction; networks; network formation. (search for similar items in EconPapers)
JEL-codes: A14 C73 C91 C92 D8 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-net and nep-soc
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Endogenous Network Formation In the Laboratory (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:smu:ecowpa:0701

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