Games on Networks: Direct Complements and Indirect Substitutes

32 Pages Posted: 6 Feb 2013

See all articles by Sergio Currarini

Sergio Currarini

University of Leicester - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia

Elena Fumagalli

University Ca' Foscari of Venice and University of East Anglia

Fabrizio Panebianco

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS); Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Date Written: February 5, 2013

Abstract

Many types of economic and social activities involve significant behavioral complementarities (peer effects) with neighbors in the social network. The same activities often exert externalities that cummulate in 'stocks' affecting agents' welfare and incentives. For instance, smoking is subject to peer effects, and the stock of passive smoke increases the marginal risks of bad health, decreasing the incentives to smoke. In the linear quadratic framework studied by Ballester et al. (2006), we consider contexts where agents' incentives decrease with the 'stock' to which neighbors are exposed (agents may, for instance, care about their friends' health). In such contexts, the patterns of strategic interaction differ from the network of social relations, as agents display strategic substitution with distance-two neighbors. We show that behavior is predicted by a weighted Bonacich centrality index, with weights accounting for distance-two relations. We find that both maximal behavior and key-players tend to move to the periphery of the network, and we discuss the effect of close-knit communities and segregated groups on aggregate behavior. We finally discuss the implications for peer effects identification and for the emergence of potential biases in the estimation of social effects.

Keywords: networks, peer effects, key-player, centrality, substitutes, altruism

JEL Classification: D01, D85

Suggested Citation

Currarini, Sergio and Fumagalli, Elena and Panebianco, Fabrizio, Games on Networks: Direct Complements and Indirect Substitutes (February 5, 2013). FEEM Working Paper No. 4.2013. Available at SSRN: https://ssrn.com/abstract=2212044 or http://dx.doi.org/10.2139/ssrn.2212044

Sergio Currarini (Contact Author)

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Elena Fumagalli

University Ca' Foscari of Venice and University of East Anglia ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Fabrizio Panebianco

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

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