DP8757 The Strategic Formation of Networks: Experimental Evidence

Author(s): Juan D Carrillo, Arya Gaduh
Publication Date: January 2012
Keyword(s): Laboratory experiments, Myopic rationality, Pairwise stable equilibria, Social networks
JEL(s): C73, C92, D85
Programme Areas: Public Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8757

We use a laboratory experiment to explore dynamic network formation in a six-player game where link creation requires mutual consent. The analysis of network outcomes suggests that the process tends to converge to the pairwise-stable (PWS) equilibrium when it exists and not to converge at all when it does not. When multiple PWS equilibria exist, subjects tend to coordinate on the high-payoff one. The analysis at the single choice level indicates that the percentage of myopically rational behavior is generally high. Deviations are more prevalent when actions are reversible, when marginal payoff losses are smaller and when deviations involve excessive links that can be removed unilaterally later on. There is, however, some heterogeneity across subjects.