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Experiments with Network Formation

Author

Listed:
  • John Duffy
  • Dean Corbae
Abstract
We examine how groups of agents form trading networks in the presence of idiosyncratic risk and the possibility of contagion. Specifically, in our model, four agents play a two-stage, finitely repeated game. In the first stage, the network structure is endogenously determined in a noncooperative proposal game. In the second stage, agents play multiple rounds of a coordination game against all of their chosen `neighbors' after the realization of a payoff relevant shock. While parsimonious, our four agent environment is rich enough to capture all of the important interaction structures that have appeared in the networks literature, including bilateral (marriage), local interaction (wheel), star, and uniform matching (complete) networks. Marriage is not only the ex-ante efficient network in our environment, but also stable in the sense of being immune to unilateral deviations. Since our framework admits multiple equilibria, we further examine which types of networks are likely to emerge in an experiment that start subjects out in various symmetric networks but then allows them to endogenously form networks. Consistent with our theory, marriage networks are the most frequent and stable network structures; once a marriage network is endogenously implemented by subjects, it remains in place for the duration of a session. Further, the distribution of network structures is significantly different from that which would result from random link proposals and payoff efficieny in the second stage coordination game is high at around 90 percent of the predicted level. We conclude that our experimental findings provide support for our theoretical predictions.

Suggested Citation

  • John Duffy & Dean Corbae, 2006. "Experiments with Network Formation," Working Paper 292, Department of Economics, University of Pittsburgh, revised Aug 2007.
    • Handle: RePEc:pit:wpaper:292
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Kosfeld, "undated". "Network Experiments," IEW - Working Papers 152, Institute for Empirical Research in Economics - University of Zurich.
    2. Kleimeier, Stefanie & Sander, Harald, 2006. "Regional versus global integration of euro-zone retail banking markets: Understanding the recent evidence from price-based integration measures," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(3), pages 353-368, July.
    3. Corbae, Dean & Duffy, John, 2008. "Experiments with network formation," Games and Economic Behavior, Elsevier, vol. 64(1), pages 81-120, September.
    4. Jackson, Matthew O. & Watts, Alison, 2010. "Social games: Matching and the play of finitely repeated games," Games and Economic Behavior, Elsevier, vol. 70(1), pages 170-191, September.
    5. Harmsen - van Hout, M.J.W. & Dellaert, B.G.C. & Herings, P.J.J., 2008. "Behavorial effects in individual decisions of network formation," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    6. Takács, Károly, 2010. "Hálózati kísérletek [Network experiments]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 958-979.

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