The Strategic Formation of Networks: Experimental Evidence

61 Pages Posted: 20 Jan 2012

See all articles by Juan D. Carrillo

Juan D. Carrillo

University of Southern California - Department of Economics; Centre for Economic Policy Research (CEPR)

Arya Gaduh

University of Arkansas

Date Written: January 2012

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.

Keywords: Laboratory experiments, Myopic rationality, Pairwise stable equilibria, Social networks

JEL Classification: C73, C92, D85

Suggested Citation

Carrillo, Juan D. and Gaduh, Arya, The Strategic Formation of Networks: Experimental Evidence (January 2012). CEPR Discussion Paper No. DP8757, Available at SSRN: https://ssrn.com/abstract=1988688

Juan D. Carrillo (Contact Author)

University of Southern California - Department of Economics ( email )

3022 S. Vermont Ave.
Los Angeles, CA 90089
United States
213-740-3526 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Arya Gaduh

University of Arkansas ( email )

402 Business Building
Fayetteville, AR 72701
United States
1-479-575-8776 (Phone)

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