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It's all about Connections: Evidence on Network Formation

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Author Info
Armin Falk, Michael Kosfeld

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Abstract

We present an economic experiment on network formation, in which subjects can decide to form links to one another. Direct links are costly but being connected is valuable. The game-theoretic basis for our experiment is the model of Bala and Goyal (2000). They distinguish between two scenarios regarding the flow of benefits through a network, the so-called 1-way and 2-way flow model. Our main results show that the prediction based on Nash and strict Nash equilibrium works well in the 1-way flow model but fails largely in the 2-way flow model. We observe a strong learning dynamic in the 1-way flow model but less so in the 2-way flow model. Finally, costs of a direct link have a positive impact on the occurrence of (strict) Nash networks in the 1-way flow model but a negative impact in the 2-way flow model. In our discussion on possible explanations for these results we focus on strategic asymmetry and asymmetry with respect to payoffs. We find that the latter asymmetry, i.e., payoff inequity, plays an important role in the network formation process.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp146.

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Handle: RePEc:zur:iewwpx:146

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Related research
Keywords: network formation; experiments; coordination; fairness;

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Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Daniela Di Cagno & Emanuela Sciubba, 2008. "Social Networks and Trust: not the Experimental Evidence you may Expect," Birkbeck Working Papers in Economics and Finance 0801, Birkbeck, School of Economics, Mathematics & Statistics. [Downloadable!]
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  16. Andrea Galeotti, 2006. "One-way flow networks: the role of heterogeneity," Economic Theory, Springer, vol. 29(1), pages 163-179, September. [Downloadable!] (restricted)
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  17. Matthew O. Jackson, 2003. "A survey of models of network formation: Stability and efficiency," Working Papers 1161, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  18. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin & Ott, Marion & Vogt, Bodo, 2004. "Searching for "Stars" - Recent Experimental Results on Network Formation -," Sonderforschungsbereich 504 Publications 04-34, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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