Characterization of Stable Manea Bargaining Networks

Abstract

This paper examines conditions for stability in bargaining networks. Network formation is endogenized and payoffs are determined according to the algorithm developed by Manea (AER, 2011). Unlike other papers in the literature, agents now internalize the entire network structure when choosing trading partners. The set of link stable networks is characterized for all positive fixed costs per link. It can be shown that for all positive costs link-stable Manea bargaining networks are of degree two or less. This means that link stable Manea networks are circles and line segments. For high enough costs, below autarky levels, the only link stable networks involve bilateral bargaining. The analysis is also extended to Nash stable and strongly Nash stable networks.

Keywords: Network Formation; Bargaining; Stability

JEL Classification: D85, C72, C78