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Economics Seminar

Authors:

• Vai-Lam Mui
  Monash University

• Birendra Rai
  Monash University

• Chiu Ki So
  Monash University

We study non-cooperative network formation models with two primitives – a set of agents and a set of exogenously given events. Events are conceived as entities around which joint activities can be organized and play no role beyond serving as platforms to mediate connections between agents. Agents incur costs in subscribing to events and derive benefits from being connected with other agents. This framework differs from most existing models of network formation where agents decide which agents to link with. We first study a benchmark environment with symmetric agents, identical subscription costs, and no decay in benefits from indirect connections. We characterize the set of strongly efficient and Nash stable architectures and show that the tension between efficiency and stability is quite weak because there is no conflict of interest between agents. Conflict of interest is absent because, for any given set of parameter values, the underlying preference orderings of agents over the set of feasible networks are such that there is at least one network which is best from the perspective of every agent. The tension between efficiency and stability that does exist reflects coordination failure among agents. This result continues to hold even when the benefit from a connection decreases with the distance between agents. We finally analyze a model with asymmetric agents to further clarify the distinct roles played by conflict of interest and coordination failure in generating the tension between efficiency and stability.