DP8807 Nestedness in Networks: A Theoretical Model and Some Applications

Author(s): Michael König, Claudio J. Tessone, Yves Zenou
Publication Date: January 2012
Keyword(s): Bonacich centrality, nested split graphs, nestedness, network formation
JEL(s): A14, C63, D85
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8807

We develop a dynamic network formation model that can explain the observed nestedness in real-world networks. Links are formed on the basis of agents? centrality and have an exponentially distributed life time. We use stochastic stability to identify the networks to which the network formation process converges and find that they are nested split graphs. We completely determine the topological properties of the stochastically stable networks and show that they match features exhibited by real-world networks. Using four different network datasets, we empirically test our model and show that it fits well the observed networks.