[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/ott/wpaper/1602e.html
   My bibliography  Save this paper

Volume of Trade and Dynamic Network Formation in Two-Sided Economies

Author

Listed:
  • Roland Pongou

    (Department of Economics, University of Ottawa)

  • Roberto Serrano

    (Department of Economics, Brown University)

Abstract
We study the long-run stability of trade networks in a two-sided economy. Each agent desires relationships with the other side, but having multiple partners is costly. This cost-benefit tradeoff results in each agent having a single-peaked utility over the number of partners-the volume of trade-, the peak being greater for agents on one side than those on the other. We propose a stochastic matching process in which self-interested agents form and sever links over time. Links can be added or deleted, sometimes simultaneously by a single agent. While the unperturbed process yields each pairwise stable network as an absorbing state, stochastic stability in two perturbed processes provides a significant refinement, leading respectively to egalitarian and anti-egalitarian pairwise stable networks. These distinct network configurations have implications for the concentration on each side of the market of a random information shock, which may affect structurally identical economies differently. The analysis captures stylized facts, related to herd behavior, market fragmentation, concentration and contagion asymmetry, in several two-sided economies. It also rationalizes long-run population imbalance between the two sides of certain buyer-seller markets.

Suggested Citation

  • Roland Pongou & Roberto Serrano, 2016. "Volume of Trade and Dynamic Network Formation in Two-Sided Economies," Working Papers 1602E, University of Ottawa, Department of Economics.
    • Handle: RePEc:ott:wpaper:1602e
    as

    Download full text from publisher

    File URL: http://sciencessociales.uottawa.ca/economics/sites/socialsciences.uottawa.ca.economics/files/1602e_0.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Slikker, Marco & van den Nouweland, Anne, 2001. "A One-Stage Model of Link Formation and Payoff Division," Games and Economic Behavior, Elsevier, vol. 34(1), pages 153-175, January.
    2. Page, Frank Jr. & Wooders, Myrna H. & Kamat, Samir, 2005. "Networks and farsighted stability," Journal of Economic Theory, Elsevier, vol. 120(2), pages 257-269, February.
    3. repec:cup:cbooks:9780511771576 is not listed on IDEAS
    4. Staudigl, Mathias, 2011. "Potential games in volatile environments," Games and Economic Behavior, Elsevier, vol. 72(1), pages 271-287, May.
    5. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
    6. Stef Tijs & Anne van den Nouweland & Bhaskar Dutta, 1998. "Link formation in cooperative situations," International Journal of Game Theory, Springer;Game Theory Society, vol. 27(2), pages 245-256.
    7. Vega-Redondo,Fernando, 2007. "Complex Social Networks," Cambridge Books, Cambridge University Press, number 9780521857406, September.
    8. Jackson, Matthew O. & van den Nouweland, Anne, 2005. "Strongly stable networks," Games and Economic Behavior, Elsevier, vol. 51(2), pages 420-444, May.
    9. Roland Pongou & Roberto Serrano, 2009. "A Dynamic Theory of Fidelity Networks with an Application to the Spread of HIV / AIDS," Working Papers wp2009_0909, CEMFI.
    10. Matthew O. Jackson & Leeat Yariv, 2007. "Diffusion of Behavior and Equilibrium Properties in Network Games," American Economic Review, American Economic Association, vol. 97(2), pages 92-98, May.
    11. Feri, Francesco, 2007. "Stochastic stability in networks with decay," Journal of Economic Theory, Elsevier, vol. 135(1), pages 442-457, July.
    12. Joshua Goldstein, 1999. "The leveling of divorce in the united states," Demography, Springer;Population Association of America (PAA), vol. 36(3), pages 409-414, August.
    13. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    14. , & ,, 2006. "A theory of stability in many-to-many matching markets," Theoretical Economics, Econometric Society, vol. 1(2), pages 233-273, June.
    15. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
    16. Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
    17. Roger B. Myerson, 1977. "Graphs and Cooperation in Games," Mathematics of Operations Research, INFORMS, vol. 2(3), pages 225-229, August.
    18. Alvin E. Roth, 2007. "Repugnance as a Constraint on Markets," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 37-58, Summer.
    19. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    20. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
    21. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
    22. Bergin, James & Lipman, Barton L, 1996. "Evolution with State-Dependent Mutations," Econometrica, Econometric Society, vol. 64(4), pages 943-956, July.
    23. H. Peyton Young, 2009. "Innovation Diffusion in Heterogeneous Populations: Contagion, Social Influence, and Social Learning," American Economic Review, American Economic Association, vol. 99(5), pages 1899-1924, December.
    24. Easley,David & Kleinberg,Jon, 2010. "Networks, Crowds, and Markets," Cambridge Books, Cambridge University Press, number 9780521195331, September.
    25. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    26. Michele Tertilt, 2005. "Polygyny, Fertility, and Savings," Journal of Political Economy, University of Chicago Press, vol. 113(6), pages 1341-1370, December.
    27. Dutta, Bhaskar & Mutuswami, Suresh, 1997. "Stable Networks," Journal of Economic Theory, Elsevier, vol. 76(2), pages 322-344, October.
      • Dutta, Bhaskar & Mutuswami, Suresh, 1996. "Stable Networks," Working Papers 971, California Institute of Technology, Division of the Humanities and Social Sciences.
    28. Roland Pongou & Roberto Serrano, 2013. "Fidelity Networks and Long-Run Trends in HIV/AIDS Gender Gaps," American Economic Review, American Economic Association, vol. 103(3), pages 298-302, May.
    29. Jackson Matthew O. & Rogers Brian W., 2007. "Relating Network Structure to Diffusion Properties through Stochastic Dominance," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-16, February.
    30. Becker, Gary S, 1974. "A Theory of Marriage: Part II," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 11-26, Part II, .
    31. Vega-Redondo,Fernando, 2007. "Complex Social Networks," Cambridge Books, Cambridge University Press, number 9780521674096, September.
    32. Robert Schoen & William Urton & Karen Woodrow & John Bai, 1985. "Marriage and divorce in twentieth century American cohorts," Demography, Springer;Population Association of America (PAA), vol. 22(1), pages 101-114, February.
    33. Gary S. Becker, 1974. "A Theory of Marriage," NBER Chapters, in: Economics of the Family: Marriage, Children, and Human Capital, pages 299-351, National Bureau of Economic Research, Inc.
    34. Roth, Alvin E & Vande Vate, John H, 1990. "Random Paths to Stability in Two-Sided Matching," Econometrica, Econometric Society, vol. 58(6), pages 1475-1480, November.
    35. Cabrales, Antonio & Calvó-Armengol, Antoni & Zenou, Yves, 2011. "Social interactions and spillovers," Games and Economic Behavior, Elsevier, vol. 72(2), pages 339-360, June.
    36. Jackson, Matthew O. & Watts, Alison, 2002. "The Evolution of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 106(2), pages 265-295, October.
    37. Watts, Alison, 2001. "A Dynamic Model of Network Formation," Games and Economic Behavior, Elsevier, vol. 34(2), pages 331-341, February.
    38. de Martí Beltran, Joan, 2009. "Matthew O. Jackson, Social and Economic Networks , Princeton University Press (2008)," Regional Science and Urban Economics, Elsevier, vol. 39(5), pages 644-645, September.
    39. Matthew O. Jackson & Brian W. Rogers, 2007. "Meeting Strangers and Friends of Friends: How Random Are Social Networks?," American Economic Review, American Economic Association, vol. 97(3), pages 890-915, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pongou, Roland & Tondji, Jean-Baptiste, 2018. "Valuing inputs under supply uncertainty: The Bayesian Shapley value," Games and Economic Behavior, Elsevier, vol. 108(C), pages 206-224.
    2. Pritha Dev & Blessing U. Mberu & Roland Pongou, 2016. "Ethnic Inequality: Theory and Evidence from Formal Education in Nigeria," Economic Development and Cultural Change, University of Chicago Press, vol. 64(4), pages 603-660.
    3. Dessy, Sylvain & Diarra, Setou & Pongou, Roland, 2017. "Underage Brides and Grooms' Education," MPRA Paper 77326, University Library of Munich, Germany.
    4. Ghislain H. Demeze-Jouatsa & Roland Pongou & Jean-Baptiste Tondji, 2021. "A Free and Fair Economy: A Game of Justice and Inclusion," Papers 2107.12870, arXiv.org.
    5. Sylvain Dessy & Setou Diarra & Roland Pongou, 2017. "Underage Brides and Grooms’ Education," Working Papers 1704E, University of Ottawa, Department of Economics.
    6. Roland Pongou & Guy Tchuente & Jean-Baptiste Tondji, 2020. "An Economic Model of Health-vs-Wealth Prioritization During COVID-19: Optimal Lockdown, Network Centrality, and Segregation," Working Papers 2009E Classification-E61,, University of Ottawa, Department of Economics.
    7. Pongou, Roland & Tondji, Jean-Baptiste, 2024. "The reciprocity set," Journal of Mathematical Economics, Elsevier, vol. 112(C).
    8. Demeze-Jouatsa, Ghislain-Herman & Pongou, Roland & Tondji, Jean-Baptiste, 2021. "A Free and Fair Economy: A Game of Justice and Inclusion," Center for Mathematical Economics Working Papers 653, Center for Mathematical Economics, Bielefeld University.
    9. Roland Pongou & Guy Tchuente & Jean-Baptiste Tondji, 2023. "Optimal interventions in networks during a pandemic," Journal of Population Economics, Springer;European Society for Population Economics, vol. 36(2), pages 847-883, April.
    10. Pongou, Roland & Tchuente, Guy & Tondji, Jean-Baptiste, 2021. "Optimally Targeting Interventions in Networks during a Pandemic: Theory and Evidence from the Networks of Nursing Homes in the United States," GLO Discussion Paper Series 957, Global Labor Organization (GLO).
    11. Dev, Pritha, 2018. "Networks of information exchange: Are link formation decisions strategic?," Economics Letters, Elsevier, vol. 162(C), pages 86-92.
    12. Roland Pongou & Guy Tchuente & Jean-Baptiste Tondji, 2021. "Optimally Targeting Interventions in Networks during a Pandemic: Theory and Evidence from the Networks of Nursing Homes in the United States," Papers 2110.10230, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pongou, Roland & Serrano, Roberto, 2013. "Dynamic Network Formation in Two-Sided Economies," MPRA Paper 46021, University Library of Munich, Germany.
    2. Roland Pongou & Roberto Serrano, 2009. "A dynamic theory of fidelity networks with an application to the spread of HIV/AIDS," Working Papers 2009-03, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
    3. Hellmann, Tim & Staudigl, Mathias, 2014. "Evolution of social networks," European Journal of Operational Research, Elsevier, vol. 234(3), pages 583-596.
    4. Joost Vandenbossche & Thomas Demuynck, 2013. "Network Formation with Heterogeneous Agents and Absolute Friction," Computational Economics, Springer;Society for Computational Economics, vol. 42(1), pages 23-45, June.
    5. Jackson, Matthew O. & Zenou, Yves, 2015. "Games on Networks," Handbook of Game Theory with Economic Applications,, Elsevier.
    6. , D. & Tessone, Claudio J. & ,, 2014. "Nestedness in networks: A theoretical model and some applications," Theoretical Economics, Econometric Society, vol. 9(3), September.
    7. Leonardo Boncinelli & Alessio Muscillo & Paolo Pin, 2022. "Efficiency and Stability in a Process of Teams Formation," Dynamic Games and Applications, Springer, vol. 12(4), pages 1101-1129, December.
    8. Matthew O. Jackson & Brian W. Rogers & Yves Zenou, 2016. "Networks: An Economic Perspective," Papers 1608.07901, arXiv.org.
    9. Jean-François Caulier & Michel Grabisch & Agnieszka Rusinowska, 2015. "An allocation rule for dynamic random network formation processes," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(2), pages 283-313, October.
    10. Charness, Gary & Jackson, Matthew O., 2007. "Group play in games and the role of consent in network formation," Journal of Economic Theory, Elsevier, vol. 136(1), pages 417-445, September.
    11. Youngsub Chun & Sunghoon Hong & Bong Chan Koh, 2017. "Population invariance properties of social and economic networks," International Journal of Economic Theory, The International Society for Economic Theory, vol. 13(3), pages 255-267, September.
    12. Pandey, Siddhi Gyan, 2021. "Evolution of cooperative networks," Working Papers 21/346, National Institute of Public Finance and Policy.
    13. Jackson, Matthew O. & Watts, Alison, 2002. "The Evolution of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 106(2), pages 265-295, October.
    14. Matthew O. Jackson, 2003. "A Survey of Models of Network Formation: Stability and Efficiency," Game Theory and Information 0303011, University Library of Munich, Germany.
    15. Frank H. Page & Myrna H. Wooders, 2009. "Endogenous Network Dynamics," Working Papers 2009.28, Fondazione Eni Enrico Mattei.
    16. Liu, Xiaodong & Patacchini, Eleonora & Zenou, Yves & Lee, Lung-Fei, 2011. "Criminal Networks: Who is the Key Player?," Research Papers in Economics 2011:7, Stockholm University, Department of Economics.
    17. Péter Bayer & Ani Guerdjikova, 2020. "Optimism leads to optimality: Ambiguity in network formation," Working Papers hal-03005107, HAL.
    18. Chenghong Luo & Ana Mauleon & Vincent Vannetelbosch, 2021. "Network formation with myopic and farsighted players," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1283-1317, June.
    19. Gilles, R.P. & Sarangi, S., 2003. "The Role of Trust in Costly Network Formation," Discussion Paper 2003-53, Tilburg University, Center for Economic Research.
    20. Page, Frank Jr. & Wooders, Myrna H. & Kamat, Samir, 2005. "Networks and farsighted stability," Journal of Economic Theory, Elsevier, vol. 120(2), pages 257-269, February.

    More about this item

    Keywords

    Two-sided economies; trade networks; pairwise stability; stochastic stability; herd behavior; fragmentation; concentration; contagion asymmetry;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J00 - Labor and Demographic Economics - - General - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ott:wpaper:1602e. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Aggey Semenov (email available below). General contact details of provider: https://edirc.repec.org/data/deottca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.