Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/62882
Authors: 
Goyal, Sanjeev
Vega-Redondo, Fernando
Year of Publication: 
2003
Series/Report no.: 
Working Paper, Department of Economics, Queen Mary, University of London 481
Abstract: 
This paper develops a simple model to examine the interaction between partner choice and individual behavior in games of coordination. An important ingredient of our approach is the way we model partner choice: we suppose that a player can establish ties with other players by unilaterally investing in costly pair-wise links. In this context, individual efforts to balance the costs and benefits of links are shown to lead to a unique equilibrium interaction architecture. The dynamics of network formation, however, has powerful effects on individual behavior: if costs of forming links are below a certain threshold then players coordinate on the risk-dominant action, while if costs are above this threshold then they coordinate on the efficient action. These findings are robust to a variety of modifications in the link formation process. For example, it may be posited that, in order for a link to materialize, the link proposal must be two-sided (i.e. put forward by both agents); or that, in case of a unilateral proposal, the link may be refused by the other party (if, say, the latter's net payoff is negative); or that a pair of agents can play the game even if connected only through indirect links.
Subjects: 
Networks, Links, Coordination games, Equilibrium selection, Risk dominance, Efficiency
JEL: 
C7
D6
Document Type: 
Working Paper

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