Network Formation with Heterogeneous Players

This paper studies a connections model of network formation in which players are heterogeneous with respect to values as well as the cost of forming links. We start by showing that value heterogeneity is important in determining the level of connectedness of a network, while cost heterogeneity is important in shaping both the level of connectedness as well as the architecture of individual components in a network. We then explore the role of cost heterogeneity in a society which is divided into distinct groups and intra-group links are cheaper as compared to inter-group links. Here we find that inter-connected stars with locally central players are socially efficient as well as dynamically stable. We interpret our results as saying that centrality, center-sponsorship and small diameter are robust features of networks.