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Title: The Strategic Formation of Networks: Experimental Evidence

Author(s): Juan D Carrillo and Arya Gaduh

Publication Date: January 2012

Keyword(s): Laboratory experiments, Myopic rationality, Pairwise stable equilibria and Social networks

Programme Area(s): Industrial Organization and Public Economics

Abstract: 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.

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Bibliographic Reference

Carrillo, J and Gaduh, A. 2012. 'The Strategic Formation of Networks: Experimental Evidence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8757