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Strategic Random Networks

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Abstract
To study how economic fundamentals affect the formation of social networks, a model is needed that (i) has agents responding rationally to incentives (ii) can be taken to the data. This paper combines game-theoretic and statistical approaches to network formation in order to develop such a model. Agents spend costly resources to socialize. Their effort levels determine the probabilities of relationships, which are valuable for their direct benefits and also because they lead to other relationships in a second stage of “meeting friends of friends”. The model predicts random graphs with tunable degree distributions and clustering, and characterizes how those statistics depend on the economic fundamentals. When the value of friends-of-friends is low, equilibrium networks can be either sparse or thick. But as soon as this value crosses a key threshold, the sparse equilibrium disappears completely and only densely connected networks are possible. This transition mitigates an extreme inefficiency.

Suggested Citation

  • Ben Golub & Yair Livne, 2010. "Strategic Random Networks," Working Papers 10-21, NET Institute.
    • Handle: RePEc:net:wpaper:1021
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    File URL: http://www.netinst.org/Golub_Livne_10-21.pdf
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    References listed on IDEAS

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    Cited by:

    1. Orlova, Olena, 2020. "Personal preferences in networks," Center for Mathematical Economics Working Papers 631, Center for Mathematical Economics, Bielefeld University.
    2. Cabrales, Antonio & Calvó-Armengol, Antoni & Zenou, Yves, 2011. "Social interactions and spillovers," Games and Economic Behavior, Elsevier, vol. 72(2), pages 339-360, June.
    3. Robert P. Gilles, 2019. "Building social networks under consent: A survey," Papers 1910.11693, arXiv.org, revised Apr 2020.
    4. Baumann, Leonie, 2021. "A model of weighted network formation," Theoretical Economics, Econometric Society, vol. 16(1), January.
    5. Isabel Melguizo, 2023. "Group representation concerns and network formation," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 151-179, January.
    6. Krishna Dasaratha, 2019. "Innovation and Strategic Network Formation," Papers 1911.06872, arXiv.org, revised Mar 2022.

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    More about this item

    Keywords

    network formation; random graphs; random networks; phase transition;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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