Relationship Externalities

24 Pages Posted: 24 Jun 2020

See all articles by Selman Erol

Selman Erol

Carnegie Mellon University - David A. Tepper School of Business

Rakesh Vohra

University of Pennsylvania - Department of Economics

Date Written: May 30, 2020

Abstract

We study a model of network externalities transmitted over links wherein the externalities stem from links themselves rather than nodes. For example, bilateral investments can fail and trigger cascading defaults of firms. Joint research projects can succeed and innovations can be diffused over the network. We characterize stable and efficient networks. Under negative externalities, disjoint cliques are stable and efficient. Under positive externalities complete networks and star networks are stable. Efficient networks feature are a mix: pineapple networks which consist of one large clique and a star network appended to each other.

Keywords: Network Formation, Stability, Strong Stability, Externalities

JEL Classification: D62, D85

Suggested Citation

Erol, Selman and Vohra, Rakesh, Relationship Externalities (May 30, 2020). Available at SSRN: https://ssrn.com/abstract=3614871 or http://dx.doi.org/10.2139/ssrn.3614871

Selman Erol (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Rakesh Vohra

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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