Learning, Network Formation and Coordination

In many economic and social contexts, individuals can undertake a transaction only if they are `linked' or related to each other. We take the view that these links are costly, in the sense that it takes effort and resources to create and maintain them. The link formation decisions of the players define a network of social interaction. We study the incentives of individuals to form links and the effects of this link formation on the nature of social coordination. Our analysis shows that equilibrium networks have simple architectures; they are either complete networks or stars. Moreover, the process of network formation has powerful effects on social coordination. For low costs of forming links all individuals coordinate on the the risk-dominant action, while for high costs of forming links individuals coordinate on the efficient action.