Complex Networks and Local Bayesian Equilibrium

Abstract

Finding a satisfactory way to represent individual decisions presents a challenge for economic models of social networks. I introduce a new solution concept, local Bayesian equilibrium, that allows us to capture strategic effects while gaining some of the tractability of simpler heurisitcs. The central idea is that players think "locally." They adopt simple models of their neighborhoods in the network and are Bayesian within these models. I illustrate the solution concept through several examples, and I explore a deeper relationship between the structure of the broader network and the common prior assumption.

Keywords: Networks, Bounded Rationality, Local Bayesian Equilibrium