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The formation of networks with local spillovers and limited observability

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  • , David

    (Department of Economics, University of Zurich)

Abstract
This paper analyzes the formation of networks in which each agent is assumed to possess some information of value to the other agents in the network. Agents derive payoff from having access to the information of others through communication or spillovers via the links between them. Linking decisions are based on network-dependent marginal payoff and a network independent noise capturing exogenous idiosyncratic effects. Moreover, agents have a limited observation radius when deciding to whom to form a link. I find that for small noise the observation radius does not matter and strongly centralized networks emerge. However, for large noise, a smaller observation radius generates networks with a larger degree variance. These networks can also be shown to have larger aggregate payoff. I then estimate the model using a network of coinventors and scientific collaborations in physics and economics, and find that the model can closely reproduce a variety of observed patterns. I show that local search is important in all the empirical networks considered, but that economists tend to search more broadly for new collaboration opportunities.

Suggested Citation

  • , David, 2016. "The formation of networks with local spillovers and limited observability," Theoretical Economics, Econometric Society, vol. 11(3), September.
    • Handle: RePEc:the:publsh:1524
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    3. Gaonkar, Shweta & Mele, Angelo, 2023. "A model of inter-organizational network formation," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 82-104.
    4. Carayol, Nicolas & Bergé, Laurent & Cassi, Lorenzo & Roux, Pascale, 2019. "Unintended triadic closure in social networks: The strategic formation of research collaborations between French inventors," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 218-238.
    5. Koenig, Michael & Hsieh, Chih-Sheng & Liu, Xiaodong & Zimmermann, Christian, 2018. "Superstar Economists: Coauthorship networks and research output," CEPR Discussion Papers 13239, C.E.P.R. Discussion Papers.
    6. Harsh Gupta & Mason A. Porter, 2020. "Mixed Logit Models and Network Formation," Papers 2006.16516, arXiv.org, revised Aug 2022.

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    More about this item

    Keywords

    Diffusion; network formation; growing networks; limited observability;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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