Volume of Trade and Dynamic Network Formation in Two-Sided Economies

39 Pages Posted: 27 Jun 2013

See all articles by Roland Pongou

Roland Pongou

University of Ottawa - Department of Economics

Roberto Serrano

Brown University

Date Written: June 26, 2013

Abstract

We study the long-run stability of trade networks in a two-sided economy of agents labelled men and women. Each agent desires relationships with the other type, but having multiple partners is costly. This cost-benefit trade-off results in each agent having a single-peaked utility over the number of partners, - the volume of trade - , peak being greater for men than for women. We propose a stochastic matching process in which self-interested agents form and sever links over time. Links can be added or deleted, sometimes simultaneously by a single agent. While the unperturbed process yields each pairwise stable network as an absorbing state, stochastic stability in two perturbed processes provides a significant refinement, leading respectively to egalitarian and anti-egalitarian pairwise stable networks. This has implications for the concentration on each side of the market of a random information shock. The analysis captures stylized facts, related to market fragmentation, concentration and contagion asymmetry, in several two-sided economies.

Keywords: Two-sided networks, pairwise stability, stochastic stability, herd externality, informational cascade, fragmentation, concentration, economy thinness, contagion asymmetry

JEL Classification: A14, C7, I12, J00

Suggested Citation

Pongou, Roland and Serrano, Roberto, Volume of Trade and Dynamic Network Formation in Two-Sided Economies (June 26, 2013). Available at SSRN: https://ssrn.com/abstract=2285692 or http://dx.doi.org/10.2139/ssrn.2285692

Roland Pongou (Contact Author)

University of Ottawa - Department of Economics ( email )

200 Wilbrod Street
Ottawa, Ontario K1N 6N5
Canada

Roberto Serrano

Brown University ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-1036 (Phone)
401-863-1970 (Fax)

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