Abstract
This paper extends the two-way flow model of network formation initiated by Bala and Goyal (Econometrica 68(5):1181–1230, 2000) by allowing for partner heterogeneity. In our model if a player i forms a link with player j, then she pays a cost of c j and gets benefits of V j . Our main result consists of the characterization of strict Nash networks. We find that the introduction of partner heterogeneity plays a major role in dramatically increasing the set of strict Nash equilibria. This result differs substantially from what Galeotti et al. (Games Econ Behav 54(2):353–372, 2006) find in the two-way flow connections model of network formation with player heterogeneity.
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