Abstract
This paper constructs a new theory of social networks based on the options individuals buy on each other. The model assumes that when an individual connects with another it is equivalent to buying options on the other’s reputation. The option model confers advantages not present in existing models. First, the payoff to connecting is endogenously determined by the reputation of the network. Secondly the strategy to connect is an option strategy. Thirdly, the network forms as individuals take option positions; the network evolves as individuals adjust those positions. The model allows for powerful insights into network structure, the price of connecting and the value of connecting.
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