Abstract
Theoretical models on network formation focus mostly on the stability and efficiency of equilibria, but they cannot deliver an understanding of why specific equilibrium networks are selected or whether they are all actually reachable from any starting network. To study factors affecting equilibrium selection, we designed a network formation experiment with multiple equilibria, which can be categorized in terms of the demand on players’ farsightedness and robustness to errors. In a second scenario, we increase the need for farsighted behavior by players, as well as the perceived riskiness of equilibria by adding a stage in which the network is disrupted. This setting allows us to analyze the interplay between the need for farsightedness and perceived risk of errors and its effect on network formation and equilibrium selection.
Highlights
In recent years, academic interest in networks has increased immensely, in a wide range of different disciplines, and in both empirical, as well as theoretical work
As the theory is only concerned with stable networks, not with how these networks are formed, we introduce a dynamic version of the network formation game in the experiment
This paper reports the results of an experiment on the factors influencing equilibrium selection in network formation games based on the theoretical model in Hoyer and De Jaegher [11]
Summary
Academic interest in (social) networks has increased immensely, in a wide range of different disciplines, and in both empirical, as well as theoretical work. Unlike in the setting by Jackson and Wolinsky [2], the model of Bala and Goyal [1] allows for unilateral link formation and uses the concept of strict Nash networks In their experiments, Goeree et al [3] and Falk and Kosfeld [5] did not find strong support for the formation of strict Nash networks by homogeneous players when the equilibrium networks are asymmetric. The studies by Kirchsteiger et al [8] and Morbitzer et al [9] are most related to our work in the setup of the experiment, as well as in the underlying model for network formation Both look at myopic versus farsighted stability in the setting of the basic model by Jackson and Wolinsky [2]. This means that none of the players has an incentive to make any changes in the current network
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