Making a Swap: Network Formation with Increasing Marginal Costs

39 Pages Posted: 11 Dec 2022 Last revised: 8 Mar 2024

See all articles by Evan Sadler

Evan Sadler

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: December 5, 2022

Abstract

I propose a general theory of strategic network formation based on increasing marginal linking costs and vertical heterogeneity among the players. In the spirit of revealed preference, I describe the entire set of graphs that can be stable, without making any parametric assumptions about players' preferences. Stable graphs feature assortativity and clustering, and I highlight conditions that lead to hierarchies and cliquish behavior. Several extensions demonstrate that key findings are robust. Collectively, these results map interpretable properties of preferences to particular network structures and furnish new tools to study strategic network formation.

Keywords: Network formation, pairwise stability, homophily, clustering

JEL Classification: D85

Suggested Citation

Sadler, Evan, Making a Swap: Network Formation with Increasing Marginal Costs (December 5, 2022). Available at SSRN: https://ssrn.com/abstract=4294169 or http://dx.doi.org/10.2139/ssrn.4294169

Evan Sadler (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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