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Network Formation with Endogenous Decay

Author

Listed:
  • Francesco Feri

    (Ca’ Foscari University)

Abstract
This paper considers a communication network characterized by an endogenous architecture and an imperfect transmission of information as in Bala and Goyal (2000). We propose a similar network's model with the difference that it is characterized by an endogenous rate of information decay. Endogenous decay is modelled as dependent on the result of a coordination game, played by every pair of directly linked agents and characterized by 2 equilibria: one efficient and the other risk dominant. Differently from other models, where the network represents only a channel to obtain information or to play a game, in our paper the network has an intrinsic value that depends on the chosen action in the coordination game by each participant. Moreover the endogenous network structure affects the play in the coordination game as well as the latter affects the network structure. The model has a multiplicity of equilibria and we produce a full characterization of those are stochastically stable. For sufficiently low link costs we find that in stochastically stable states network structure is ever efficient; individuals can be coordinated on efficient as well as on risk dominant action depending on the decay difference among the two equilibria in the single coordination game. For high link costs stochastically stable states can display networks that are not efficient; individuals are never coordinated on the efficient action.

Suggested Citation

  • Francesco Feri, 2005. "Network Formation with Endogenous Decay," Working Papers 2005.35, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2005.35
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    References listed on IDEAS

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    Cited by:

    1. Joost Vandenbossche & Thomas Demuynck, 2013. "Network Formation with Heterogeneous Agents and Absolute Friction," Computational Economics, Springer;Society for Computational Economics, vol. 42(1), pages 23-45, June.
    2. Francesco Feri & Miguel Meléndez-Jiménez, 2013. "Coordination in evolving networks with endogenous decay," Journal of Evolutionary Economics, Springer, vol. 23(5), pages 955-1000, November.
    3. Edoardo Gaffeo & Massimo Molinari, 2018. "A functional perspective on financial networks," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(1), pages 51-79, April.

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    More about this item

    Keywords

    Network; Decay; Strategical interaction;
    All these keywords.

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • D20 - Microeconomics - - Production and Organizations - - - General
    • J00 - Labor and Demographic Economics - - General - - - General

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