Making a Swap: Network Formation with Increasing Marginal Costs

29 Pages Posted: 11 Dec 2022

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 simple theory of strategic network formation that accounts for many empirical patterns. Three elements forge the theory: i) local linking benefits, ii) convex linking costs, and iii) swap-proofness, a new refinement of pairwise stability. If players agree about who is a more desirable neighbor, then a unique swap-proof stable graph generically exists, and stability robustly begets homophily and clustering. With further assumptions on players' desire for links, stable graphs take on structures---strong hierarchies or ordered overlapping cliques---that mirror real networks in different domains. The former in particular compel a manner of behavior in certain network games, highlighting a mechanism through which status hierarchies replicate themselves across unrelated contexts. A more general existence Theorem unifies several results in the matching literature.

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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