Shadow Links

32 Pages Posted: 18 Oct 2018

See all articles by Manuel Foerster

Manuel Foerster

University of Hamburg - Department of Economics

Ana Mauleon

Université Saint-Louis - Bruxelles; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Vincent J. Vannetelbosch

Center for Operations Research and Econometrics (CORE)

Date Written: September 25, 2018

Abstract

We propose a framework of network formation where players can form two types of links: public links are observed by everyone and shadow links are only observed by neighbors. We introduce a novel solution concept called rationalizable peer-confirming pairwise stability, which generalizes Jackson and Wolinsky (1996)’s pairwise stability notion to accommodate shadow links. We then study the case when public links and shadow links are perfect substitutes and relate our concept to pairwise stability. Finally, we consider two specific models and show how false beliefs about others’ behavior may lead to segregation in friendship networks with homophily, reducing social welfare.

Keywords: network formation, peer-confirming beliefs, private information, rationalizability, shadow links, stability

JEL Classification: A14, C70, D82, D85

Suggested Citation

Foerster, Manuel and Mauleon Echeverria, Ana Carmen and Vannetelbosch, Vincent J., Shadow Links (September 25, 2018). Available at SSRN: https://ssrn.com/abstract=3255412 or http://dx.doi.org/10.2139/ssrn.3255412

Manuel Foerster (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Ana Carmen Mauleon Echeverria

Université Saint-Louis - Bruxelles ( email )

Brussels, 1000
Belgium

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Vincent J. Vannetelbosch

Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

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