37 Pages Posted: 25 Aug 2015 Last revised: 19 Aug 2017
Date Written: August 11, 2015
We study the effects of privacy concerns on social network formation. Each individual decides which others to form links with. Links bring direct benefits from friendship but also lead to the sharing of information via a percolation process. Privacy concerns are modeled as a disutility that the individual suffers as a result of her private information being acquired by others. We specify conditions under which pure-strategy equilibria exist and characterize both pure-strategy and mixed-strategy equilibria. The resulting equilibrium networks feature clustered connections and homophily. Clustering emerges because if player a is friend with b and b is friend with c, then a's information is likely to be shared indirectly with c anyway, making it less costly for a to befriend c. Homophily emerges because small additional benefits of friendship within a group make linkages and thus information sharing within that group more likely, further increasing the likelihood within-group links.
Keywords: Network formation, Networks, Privacy
JEL Classification: D85
Suggested Citation: Suggested Citation
Acemoglu, Daron and Makhdoumi, Ali and Malekian, Azarakhsh and Ozdaglar, Asuman E., Privacy-Constrained Network Formation (August 11, 2015). MIT Department of Economics Working Paper No. 15-07; Rotman School of Management Working Paper No. 2650250. Available at SSRN: https://ssrn.com/abstract=2650250 or http://dx.doi.org/10.2139/ssrn.2650250