It's all about Connections: Evidence on Network Formation

By Armin Falk, Michael Kosfeld. Social Science Research Network, 2012

192 citations recorded by the source corpus.

Abstract We present an economic experiment on network formation, in which subjects can decide to form links to one another. Direct links are costly but being connected is valuable. The game-theoretic basis for our experiment is the model of Bala and Goyal (2000). They distinguish between two scenarios regarding the flow of benefits through a network, the so-called 1-way and 2-way flow model. Our main results show that the prediction based on Nash and strict Nash equilibrium works well in the 1-way flow model but fails largely in the 2-way flow model. We observe a strong learning dynamic in the 1-way flow model but less so in the 2-way flow model. Finally, costs of a direct link have a positive impact on the occurrence of (strict) Nash networks in the 1-way flow model but a negative impact in the 2-way flow model. In our discussion on possible explanations for these results we focus on strategic asymmetry and asymmetry with respect to payoffs. We find that the latter asymmetry, i.e., payoff inequity, plays an important role in the network formation process.

Subfields: Economics and Econometrics, Management Science and Operations Research, Safety Research

View Paper: https://www.semanticscholar.org/paper/13da98d65084bbc1bf64a33e4553e56b21c1af04

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Citations in the corpus

Network formation with heterogeneous players (2006, background): “2 There are two versions of the connections model: the case where individual players can form links unilaterally was introduced in Bala and Goyal (2000a) and Goyal (1993), while the case where links are formed based on bilateral agreement was introduced in Jackson and Wolinsky (1996). The term conne”
Learning About a New Technology: Pineapple in Ghana (2010, background): “' In addition, there is some concern that observed information links might be endogenously formed in anticipation of receiving input advice (see Bala and Goyal 2000 or Falk and Kosfeld 2003).”
Economic Networks in the Laboratory: A Survey (2004, methodology): “Falk and Kosfeld (2003) present a general analysis of the Bala-Goyal model, where both 1-way and 2-way flow networks are studied and several treatment conditions are implemented yielding different theoretical predictions.”