A Dynamic Model of Network Formation with Strategic Interactions

CCSS Working paper No. CCSS-09-006

69 Pages Posted: 27 Apr 2010 Last revised: 18 May 2010

See all articles by Michael Koenig

Michael Koenig

ETH Zürich

Claudio J. Tessone

ETH Zürich

Yves Zenou

Monash University - Department of Economics; Stockholm University; Research Institute of Industrial Economics (IUI); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 21, 2009

Abstract

In order to understand the different characteristics observed in real-world networks, one needs to analyze how and why networks form, the impact of network structure on agents' outcomes, and the evolution of networks over time. For this purpose, we combine a network game introduced by Ballester et al. [2006], where the Nash equilibrium action of each agent is proportional to her Bonacich centrality, with an endogenous network formation process. Links are formed on the basis of agents' centrality while the network is exposed to a volatile environment introducing interruptions in the connections between agents. A remarkable feature of our dynamic network formation process is that, at each period of time, the network is a nested split graph. This graph has very nice mathematical properties and are relatively easy to characterize. We show that there exists a unique stationary network (which is a nested split graph) whose topological properties completely match features exhibited by real-world networks. We also find that there exists a sharp transition in efficiency and network density from highly centralized to decentralized networks.

Keywords: Bonacich centrality, Network formation, social interactions, nested split graphs

JEL Classification: A14, C63, D85

Suggested Citation

Koenig, Michael and Tessone, Claudio J. and Zenou, Yves, A Dynamic Model of Network Formation with Strategic Interactions (October 21, 2009). CCSS Working paper No. CCSS-09-006. Available at SSRN: https://ssrn.com/abstract=1596004 or http://dx.doi.org/10.2139/ssrn.1596004

Michael Koenig

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Claudio J. Tessone (Contact Author)

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

HOME PAGE: http://www.sg.ethz.ch/people/tessonec

Yves Zenou

Monash University - Department of Economics ( email )

Australia

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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