Emergent Star Networks with Ex Ante Homogeneous Agents

Abstract

The acquisition and dispersion of information, a critical aspect of economic decisions, can occur through a network of agents (Jackson, 2009). Empirical and theoretical findings suggest that an efficient information dispersion network takes the form of a star: small numbers of agents gather information and distribute it to a large group. Despite these findings, controlled tests of this theory failed to find evidence of the emergence of such networks with an exception of Goeree et al (2008), which reports frequent star network formation with ex ante heterogeneous agents and perfect information. Empirical evidence suggests that these conditions may not always be feasible in natural environments (Feick and Price, 1987; Conley and Udry, 2010). Complement to earlier experimental research, we study institutional conditions under which star networks emerge in the presence of ex ante homogeneous agents. We find that investment limits and the right-of-first-refusal, both of which regularly coexist with star networks in natural environments, have a surprisingly strong ability to promote the formation of star networks with ex ante homogeneous agents. Using a cluster analysis, we trace the large positive effects of these institutions to the impact they have on individual's behavioral rules. In particular, we find that these institutions encourage individual rationality as well as positive habits, which then lead to the frequent and stable emergence of star networks. Our results may have important implications for environments characterized by ex ante homogeneous agents, e.g., those found in technology, marketing and agricultural sectors.