Social network formation and strategic interaction in large networks

Abstract

This paper presents a bilateral network formation model that explains why some empirical degree distributions exhibit the increasing hazard rate property (IHRP). In my model, a sequentially arriving node forms a link with an existing node through a bilateral agreement. This newborn node prefers a highly linked node; however, the more links an existing node have, the more the marginal return from an additional link diminishes. I prove that the IHRP emerges if and only if the latter effect prevails over the former. I provide two implications of the IHRP. First, I show that the IHRP is related to the existence of equilibria in network games with strategic complementarities. Second, I fit the model to empirical degree distributions and demonstrate that the IHRP is more likely to be observed in social and economic networks. For those networks, my model also exhibits a higher data-fitting performance than other distributions.