Theoretical investigations on network formation activities proceed under strong assumptions on how a link between two agents can be produced: typically link investments are assumed to be unweighted and links are formed either reciprocally or unilaterally. We propose a more general approach to link formation by allowing weighted link investment and employing a CES link formation function. This formulation has two advantages other than permitting a more flexible sponsorship of links. First, it nests the two commonly employed bilateral and unilateral link formation assumptions as special cases and thus enables robustness checks on existing works. Second, it introduces a variation in link investment substitutability and hence facilitates the analysis of how different link formation technologies affect network formation. We illustrate this approach through two applications: a game of pure network formation and a game of network formation with assorted activities. In both cases, greater link investment substitutability is associated with more unequal sponsoring of links and more diversity on network position and action choice of players. These structures have large welfare implications.
I investigate introductions as a way of network formation. In the model, players are endowed with different ability levels and want to match with a neighbour as capable as possible. Introductions for unacquainted neighbours influence the matching outcome since the network structure is changed. I show that a player is always willing to introduce two neighbours when at least one of them is less capable than him. If the two neighbours are both more capable, the introducer checks if there is an alternating path from one of the neighbours to him. The existence of the path is necessary for the introducer to be affected and the parity of the path length determines the direction of the effect. I also study an extension where players only have incomplete local information about the network. Now, decision-making becomes simpler. An introduction benefits the introducer when he is more capable than his current match.
Work in Progress:
“A Simple Model of the Power Elite” (with Marcin Dziubinski and Sanjeev Goyal)
“Foster a Community: Learning from Network Formation Dynamics”