Endogenous network dynamics

Abstract

We model the structure and strategy of social interactions prevailing at any point in time as a directed network and we address the following open question in the theory of social and economic network formation: given the rules of network and coalition formation, preferences of individuals over networks, strategic behavior of coalitions in forming networks, and the trembles of nature, what network and coalitional dynamics are likely to emergence and persist. Our main contributions are to formulate the problem of network and coalition formation as a dynamic, stochastic game and to show that: (i) the game possesses a pure stationary equilibrium (in network and coalition formation strategies), (ii) together with the trembles of nature, this stationary equilibrium determines an equilibrium Markov process of network and coalition formation, and (iii) this endogenous Markov process possesses a finite set of ergodic measures, and generates a finite, disjoint collection of nonempty subsets of networks and coalitions, each constituting a basin of attraction. Moreover, we extend to the setting of endogenous Markov dynamics the notions of path dominance core (Page-Wooders, 2009) and pairwise stability (Jackson-Wolinsky, 1996). We show that in order for any network-coalition pair to emerge and persist, it is necessary that the pair reside in one of finitely many basins of attraction. As an example, we consider a dynamic noncooperative game of club network formation and we demonstrate conditions ensuring that, even if multiple club memberships are allowed, there exists an pure stationary equilibrium where the only club networks which emerge and persist are those where players are members of a single club. The results we obtain here for endogenous network dynamics and stochastic basins of attraction are the dynamic analogs of our earlier results on endogenous network formation and strategic basins of attraction in static, abstract games of network formation (Page and Wooders, 2009), and build on the seminal contributions of Jackson and Watts (2002), Konishi and Ray (2003), and Dutta, Ghosal, and Ray (2005).