79 Pages Posted: 3 Jun 2015 Last revised: 2 May 2017
Date Written: March 1, 2017
Individual decisions are often influenced and informed by peers. We study how networks of informational flows are formed when agents acquire information from peers. In our framework, agents' actions balance adaptation and coordination motives, as in a beauty contest game. Agents may connect to each other to obtain information about the state of the economy. In equilibrium, some agents endogenously become opinion makers who are more influential, even if all agents are ex-ante identical. We show that agents prefer to connect to opinion makers first, and that opinion makers form fewer connections. We characterize the endogenous shape of the network, and we show that any strict Nash equilibrium generates a hierarchical network. Furthermore, if the marginal cost of forming links is increasing, the network is core-periphery. Finally, we study how individual characteristics determine agents' role in the network.
Keywords: Network Formation, Information Acquisition, Coordination
JEL Classification: D83, D85
Suggested Citation: Suggested Citation