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Optimism leads to optimality: Ambiguity in network formation

Peter Bayer () and Ani Guerdjikova

VfS Annual Conference 2021 (Virtual Conference): Climate Economics from Verein für Socialpolitik / German Economic Association

Abstract: We analyze a model of endogenous two-sided network formation where players are affected by uncertainty in their opponents' decisions. We model this uncertainty using the notion of equilibrium under ambiguity (Eichberger and Kelsey, 2014). Unlike the set of Nash equilibria, the set of equilibria under ambiguity does not always include underconnected and thus inefficient networks such as the empty network. On the other hand, it may include networks with unreciprocated, one-way links, which comes with an efficiency loss as linking efforts are costly. We characterize equilibria under ambiguity and provide conditions under which increased player optimism comes with an increase in efficiency in equilibrium. Next, we analyze the dynamic situation with one-sided, myopic updating with regular optimistic shocks and derive a global stability condition of benefit-maximizing equilibrium networks.

JEL-codes: D83 D85 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-gth and nep-mic
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https://www.econstor.eu/bitstream/10419/242439/1/vfs-2021-pid-50445.pdf (application/pdf)

Related works:
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2022) Downloads
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2022) Downloads
Working Paper: Optimism leads to optimality: Ambiguity in network formation (2020) Downloads
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