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On the Difficulty of Characterizing Network Formation with Endogenous Behavior

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Listed:
  • Benjamin Golub
  • Yu-Chi Hsieh
  • Evan Sadler

Abstract

Bolletta (2021, Math. Soc. Sci. 114:1-10) studies a model in which a network is strategically formed and then agents play a linear best-response investment game in it. The model is motivated by an application in which people choose both their study partners and their levels of educational effort. Agents have different one-dimensional types $\unicode{x2013}$ private returns to effort. A main result claims that pairwise Nash stable networks have a locally complete structure consisting of possibly overlapping cliques: if two agents are linked, they are part of a clique composed of all agents with types between theirs. We offer a counterexample showing that the claimed characterization is incorrect, highlight where the analysis errs, and discuss implications for network formation models.

Suggested Citation

  • Benjamin Golub & Yu-Chi Hsieh & Evan Sadler, 2023. "On the Difficulty of Characterizing Network Formation with Endogenous Behavior," Papers 2302.05831, arXiv.org, revised Feb 2023.
    • Handle: RePEc:arx:papers:2302.05831
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    References listed on IDEAS

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    1. , D. & Tessone, Claudio J. & ,, 2014. "Nestedness in networks: A theoretical model and some applications," Theoretical Economics, Econometric Society, vol. 9(3), September.
    2. Liu, Xiaodong & Patacchini, Eleonora & Zenou, Yves, 2014. "Endogenous peer effects: local aggregate or local average?," Journal of Economic Behavior & Organization, Elsevier, vol. 103(C), pages 39-59.
    3. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
    4. Jackson, Matthew O. & Zenou, Yves, 2015. "Games on Networks," Handbook of Game Theory with Economic Applications,, Elsevier.
    5. Scott E. Carrell & Bruce I. Sacerdote & James E. West, 2013. "From Natural Variation to Optimal Policy? The Importance of Endogenous Peer Group Formation," Econometrica, Econometric Society, vol. 81(3), pages 855-882, May.
    6. Anton Badev, 2021. "Nash Equilibria on (Un)Stable Networks," Econometrica, Econometric Society, vol. 89(3), pages 1179-1206, May.
    7. Hiller, Timo, 2017. "Peer effects in endogenous networks," Games and Economic Behavior, Elsevier, vol. 105(C), pages 349-367.
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