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Network Formation and Social Coordination

Goyal, Sanjeev and Vega-Redondo, Fernando (2003) Network Formation and Social Coordination. Working Paper. Queen Mary, University of London, School of Economics and Finance, Working Papers.

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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.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Networks; Links; Coordination games; Equilibrium selection; Risk dominance; Efficiency
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 08 Jan 2013 11:46
Last Modified: 08 Jan 2013 11:46

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