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Bounded Rationality and Repeated Network Formation

37 Pages Posted: 7 Jun 2006  

Nicolas Querou

Queen's University Belfast - School of Management and Economics

Sylvain Beal

University of Saint Etienne - Centre de Recherches Économiques de l'Université de Saint-Étienne (CREUSET); University of Besançon

Date Written: May 2006

Abstract

We define a finite-horizon repeated network formation game with consent, and study the differences induced by different levels of individual rationality. We prove that perfectly rational players will remain unconnected at the equilibrium, while nonempty equilibrium networks may form when, following Neyman (1985), players are assumed to behave as finite automata. We define two types of equilibria, namely the Repeated Nash Network (RNN), in which the same network forms at each period, and the Repeated Nash Equilibrium (RNE), in which different networks may form. We state a sufficient condition under which a given network may be implemented as a RNN. Then, we provide structural properties of RNE. For instance, players may form totally different networks at each period, or the networks within a given RNE may exhibit a total order relationship. Finally we investigate the question of efficiency for both Bentham and Pareto criteria.

Keywords: Repeated Network Formation Game, Two-sided Link Formation Costs, Bounded Rationality, Automata

JEL Classification: C72

Suggested Citation

Querou, Nicolas and Beal, Sylvain, Bounded Rationality and Repeated Network Formation (May 2006). FEEM Working Paper No. 74.2006. Available at SSRN: https://ssrn.com/abstract=904188 or http://dx.doi.org/10.2139/ssrn.904188

Nicolas Querou (Contact Author)

Queen's University Belfast - School of Management and Economics ( email )

25 University Square
Belfast, Northern Ireland BT7 1NN
Northern Ireland

Sylvain Beal

University of Saint Etienne - Centre de Recherches Économiques de l'Université de Saint-Étienne (CREUSET) ( email )

30 avenue de l'observatoire
Besançon, 25009
France

HOME PAGE: http://sites.google.com/site/bealpage/home

University of Besançon ( email )

UFR SJEPG
45 Avenue de l'Observatoire
25030 Besançon Cedex
France

HOME PAGE: http://sites.google.com/site/bealpage/home

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