Endogenous Network Formation and the Provision of a Public Good

Abstract

The way people form groups when facing a coordination problem poses an economically interesting question. This paper addresses the issue of what type of clubs are formed when players must participate in a public goods game with the other players belonging to their selected club. A sequential two-stage approach is used to separate network formation decisions and public goods decisions and apply farsighted stability to characterize the network structures that emerge and persist as a result of this sequence of stages. Criteria are established based on the player size and network parameters for determining the outcomes belonging to two types of stable solution sets: basins of attraction and the path dominance core. Both solution sets provide predictions for the types of clubs that will form within the defined framework.