Endogenous Network Formation Research Articles

Optimism leads to optimality: Ambiguity in network formation

We analyze a model of endogenous two-sided network formation where players are affected by uncertainty about their opponents' decisions. We model this uncertainty using the notion of equilibrium under ambiguity as in Eichberger and Kelsey (2014). Unlike the set of Nash equilibria, the set of equilibria under ambiguity does not always include underconnected and thus inefficient networks such as the empty network. On the other hand, it may include networks with unreciprocated, one-way links, which comes with an efficiency loss as linking efforts are costly. We characterize equilibria under ambiguity and provide conditions under which increased player optimism comes with an increase in connectivity and realized benefits in equilibrium. Next, we analyze network realignment under a myopic updating process with optimistic shocks and derive a global stability condition of efficient networks in the sense of Kandori et al. (1993). Under this condition, a subset of the Pareto optimal equilibrium networks is reached, specifically, networks that maximize the players' total benefits of connections.

Dynamic models of competition with endogenous network formation. A case of constant output

The paper examines discrete-time network models of competition with a finite planning horizon. Firms produce a homogeneous good in constant quantities and sell it on a common market. In the non-terminal period, the behavior of each firm is characterized by a multi-component profile that includes, among other things, the amount of investment and the structure of bilateral links with partner firms. The latter affects the technological state of the firm and allows it to reduce its current costs. The endogenous structure of partner firms is described by a network. For the models studied, the Nash equilibrium is characterized in a class of open-loop strategies.

Dynamic Models of Competition with Endogenous Network Formation

Dynamic Models of Competition with Endogenous Network Formation

Social network and tourism consumption by households: Evidence from China.

Tourism consumption is not only an important means by which to improve residents' sense of happiness but is also the main way to promote national economic development. In a traditional relational society such as China, it remains unclear how social network affects tourism consumption by households. Here, we evaluated the impact of the social network on tourism consumption by Chinese households using the data of 3254 samples from the China Family Panel Studies. The empirical results from the ordinary least square method showed that the social network promotes tourism consumption, which can be projected to increase by about 28% for every 1% increase in social network strength. This was further confirmed using the instrumental variable method to address the issue of endogenous social network formation, as well as other robustness checks. The impact of the social network on tourism consumption was heterogeneous. Compared with other residents, there were higher positive effects for high-income families, households with a head aged 35-44 years, urban families, and households in eastern China. The quantile regression results revealed that the impact of the social network was weakened with increasing tourism consumption by households. These results are crucial for policymakers, in that they could form good habits of tourism consumption and strengthen tourism market management, especially for the management of tourism negative events in the context of new media.

Network Formation and Financial Inclusion in P2P Lending: A Computational Model

What characteristics of fintech lending platforms improve access to funding and increase financial inclusion? We build a computational model of platform lending that is used to study the endogenous loan network formation process on the platform. Given the multidimensional nature of financial inclusion, we address what factors influence the number of loans, the level of investment/debt, and how those relate to the distribution of investment/debt across agents. We find that platform scale and SME reach are essential in determining the number of loans on the platform. However, the willingness to accept risks is the main driver behind the value of those loans. We also find that increased platform scale, high-risk thresholds, and low-interest rates lead to more evenly distributed investments. Moreover, we find that large platforms help increase diversity and lead to a more evenly distributed power among peers. We conclude that digital platforms increase financial inclusion, helping to foster investment and achieve a more egalitarian allocation of resources. These results can guide new theory development about the impact of P2P lending on inequality as well as help platforms to promote financial inclusion.

Network formation and systemic risk

This paper introduces a model of endogenous network formation and systemic risk. In it, firms form joint ventures called ‘links’ which are subsequently subjected to either good or bad shocks. Bad shocks incentivize default. Links yield full benefits only if the counter-party does not subsequently default on the project. Accordingly, defaults triggered by bad shocks render firms insolvent and defaults propagate via links. The model yields three insights. First, stable networks with ex-ante identical agents exhibit a core–periphery structure. Second, an increase in the probability of good shocks increases systemic risk. Third, because the network formed depends on the correlation between shocks to links, an observer who misconceives the correlation will underestimate the probability of system-wide default by a factor of a half.

Core-stability over networks with widespread externalities

The Covid-19 epidemic highlighted the significance of externalities: contacts with other people affect the chances of getting infected for our entire network. We study endogenous network formation where not only players or pairs but larger coalitions can, cooperatively change the network. We introduce a model for coalitional network stability for networks with widespread externalities. The network function form generalises the partition function form of cooperative games in allowing the network to be taken into account. The recursive core for network function form games generalises the recursive core for such environments. We present two simple examples to illustrate positive and negative externalities. The first is of a favour network and show that the core is nonempty when players must pay transfers to intermediaries; this simple setting also models economic situations such as airline networks. The second models social contacts during an epidemic and finds social bubbles as the solution.

Econet: An R Package for Parameter-Dependent Network Centrality Measures

The R package econet provides methods for estimating parameter-dependent network centrality measures with linear-in-means models. Both nonlinear least squares and maximum likelihood estimators are implemented. The methods allow for both link and node heterogeneity in network effects, endogenous network formation and the presence of unconnected nodes. The routines also compare the explanatory power of parameter-dependent network centrality measures with those of standard measures of network centrality. Benefits and features of the econet package are illustrated using data from Battaglini and Patacchini (2018) and Battaglini, Leone Sciabolazza, and Patacchini (2020).

Endogenous Social Interactions with Unobserved Networks

Abstract We present a model of endogenous network formation to recover unobserved social networks using only observable outcomes. We propose a novel equilibrium concept that allows for a sharp characterization of equilibrium behaviour and that yields a unique prediction under testable conditions. While the equilibrium is characterized by a large number of non-linear equations, we show that it can be efficiently employed to recover the networks by an appropriately designed approximate Bayesian computation method. We apply the model to recover the network of social links between lawmakers in the U.S. Congress using data from the 109th to 113th legislatures. We show that social connections are important for legislators’ productivities, and we identify some of the key determinants of network centralities in the U.S. Congress.

The Effect of Network Formation on Cooperation in the Finitely Repeated Prisoner's Dilemma

We study the effect of network formation on cooperation in the finitely repeated prisoner’s dilemma based on the game-theoretical model approach. We suggest the model explaining the effect of endogenous network formation on cooperation. We find a subgame perfect strongly pairwise-Nash equilibrium in which cooperation is achieved by the trigger strategy based on non-random partner selection. Also, in the subgame perfect strongly pairwise-Nash equilibrium, cooperators are completely connected with other cooperators, and defectors are isolated in the network. These results imply “full separation” of cooperators and defectors in the network and “marginalization” of defectors in the network.

Endogenous Production Networks under Uncertainty

Supply chain disturbances can lead to important increases in production costs. When looking for new suppliers, firms therefore worry about the risks associated with potential trading partners. We investigate the impact of beliefs and uncertainty on the structure of the production network and, through that channel, on the level and volatility of macroeconomic aggregates. To do so, we construct a model of endogenous network formation in which uncertainty about future outcomes affects the structure of the production network. In the model, when uncertainty rises producers prefer to purchase from more stable suppliers, even though they might sell at higher prices. The resulting reorganization of the network leads to less macroeconomic volatility, but at the cost of a decline in aggregate output. We calibrate the model on U.S. data and find that the mechanism can account for a sizable decline in expected GDP during periods of high uncertainty like the Great Recession.

Engineering a Chemically Defined Hydrogel Bioink for Direct Bioprinting of Microvasculature.

Vascularizing printed tissues is a critical challenge in bioprinting. While protein-based hydrogel bioinks have been successfully used to bioprint microvasculature, their compositions are ill-defined and subject to batch variation. Few studies have focused on engineering proangiogenic bioinks with defined properties to direct endogenous microvascular network formation after printing. Here, a peptide-functionalized alginate hydrogel bioink with defined mechanical, rheological, and biochemical properties is developed for direct bioprinting of microvascularized tissues. An integrin-binding peptide (RGD) and a vascular endothelial growth factor-mimetic peptide with a protease-sensitive linker are conjugated onto a biodegradable alginate to synergistically promote vascular morphogenesis and capillary-scale endothelial tube formation. Partial ionic crosslinking before printing converts the otherwise unprintable hydrogel into a viscoelastic bioink with excellent printability and cytocompatibility. We use the bioink to fabricate a compartmentalized vascularized tissue construct, wherein we observe pericyte-endothelial cell colocalization and angiogenic sprouting across a tissue interface, accompanied by deposition of fibronectin and collagen in vascular and tissue components, respectively. This study provides a tunable and translational "off-the-shelf" hydrogel bioink with defined composition for vascularized bioprinting.

Mitigating free riding in social networks: The impact of underestimating others’ ability in financial market

This study investigates overconfident traders who underestimate their contemporaries’ information processing ability, and it examines the impact of these traders on the financial market within the framework of social networks. As a byproduct, we also explore the impact of traders who overestimate their own ability, which is another manifestation of overconfidence. We find that when information acquisition is endogenous, market outcomes are improved by the effects of both underestimation and overestimation biases. The underlying logic is that traders’ overconfidence adds friction to free-riding on contemporaries’ information, thereby mitigating the information crowding-out effect of social communication. The results are robust to the extension of endogenous network formation and varying information acquisition costs.

Liquidity policies and financial fragility

This paper proposes a model of endogenous formation of financial networks whereby government and central bank policies that aim at enhancing market liquidity play a key role. Under these policies, large and less liquid investments become more profitable, however to finance them banks need to resort to the interbank market. This makes the structure of the financial network - and its associated exposure to shocks, i.e., fragility - dependent on liquidity policies chosen by the government and central bank. It is shown that policies that enhance liquidity can increase the capitalization of the banking system and, concomitantly, make it more fragile.

Acquiring Information through Peers

We develop an endogenous network formation model, in which agents form connections to acquire information. Our model features complementarity in actions as agents care not only about accuracy of their decision-making but also about the actions of other agents. In equilibrium, the information structure is a hierarchical network, and, under weakly convex cost of forming links, the equilibrium network is core-periphery. Although agents are ex ante identical, there is ex post heterogeneity in payoffs and actions. (JEL D83, D85, Z13)

Assortative matching with network spillovers

This paper investigates endogenous network formation by heterogeneous agents. The agents' types determine the value of linking and we incorporate spillovers as utility from indirect connections. We provide sufficient conditions for a class of networks with sorting to be stable for low to moderate spillovers; with only two types these networks are the unique pairwise stable ones. We also show that this sorting is suboptimal for moderate to high spillovers despite otherwise obeying the conditions for sorting in Becker (1973). This shows that in our sorted networks a tension between stability and efficiency is present. We analyze a policy tool to mitigate suboptimal sorting.

Production Networks and Learning-by-Networking

This paper investigates the endogenous formation of production networks while exploring the role of learning in a network model of production. It also provides the theoretical underpinnings of the mechanisms on how production networks amplify firm-level productivity. After finding strong evidence in favor of firm-level production networks' asymmetry, I build a model that lays a theoretical foundation between productivity and the formation of production networks. This paper also exploits a rich micro-level data set of Turkish firms to understand the model's relation to the data. Empirical evidence reveals the close relationship between the expansion of a firm’s production network and its productivity. The productivity changes in each firm studied through the sophistication of a network while proposing a learning-by-networking hypothesis with other firms in their production network.

Quid Pro Quo, Knowledge Spillover, and Industrial Quality Upgrading: Evidence from the Chinese Auto Industry

While there is a vast body of research on the benefits of FDI in developing countries, whether and how the form of FDI matters have received limited attention. This paper studies the impact of FDI via quid pro quo (technology for market access) on facilitating knowledge spillover and quality upgrading. Our context is the Chinese automobile industry, where foreign automakers are required to set up joint ventures (the “quid”) with domestic automakers in return for market access (the “quo”). The identification strategy exploits a unique dataset of detailed vehicle quality measures along multiple dimensions and relies on within-product quality variation across dimensions. We show that affiliated domestic automakers adopt more similar quality strength as their joint ventures, compared to non-affiliated pairs. The results suggest that quid pro quo generates additional knowledge spillover to affiliated domestic automakers, on top of any industry-wide spillover. We rule out endogenous joint venture network formation, overlapping customer bases, or direct technology transfer via market transactions as alternative explanations. Analyses leveraging additional micro datasets on worker flows and shared upstream suppliers among automakers demonstrate that labor mobility and supplier network are important channels in mediating knowledge spillover. On the other hand, while quid pro quo facilitates learning, such a requirement is not a prerequisite for knowledge spillover. Counterfactual exercises show that quid pro quo is not the primary driver of the overall quality improvement experienced by domestic automakers. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Multilateral stability and efficiency of trade agreements: A network formation approach

AbstractWe study the endogenous network formation of bilateral and multilateral trade agreements by means of hypergraphs and introduce the equilibrium concept of multilateral stability. We consider multicountry settings with a firm in each country that produces a homogeneous good and competes as a Cournot oligopolist in each market. Under endogenous tariffs, we find that a multilateral trade agreement governing the rules and norms of tariff setting, that is the WTO/GATT regime itself, together with a bilateral preferential trade agreement (PTA) is multilaterally stable. We also find that the existence of the WTO is necessary for the stability of the trading system. We further analyse the impact of PTAs on multilateral tariffs within the WTO. We find that the formation of PTAs increases countries' incentives for multilateral tariff reduction.

Building the community: Endogenous network formation, homophily and prosocial sorting among therapeutic community residents

BackgroundResearchers have begun to consider the ways in which social networks influence therapeutic community (TC) treatment outcomes. However, there are few studies of the way in which the social networks of TC residents develop over the course of treatment. MethodologyWe used a Temporal Exponential Random Graph Model (TERGM) to analyze changes in social networks totaling 320,387 peer affirmations exchanged between residents in three correctional TCs, one of which serves men and two of which serve both men and women. The networks were analyzed within weekly and monthly time-frames. ResultsWithin a weekly time-frame residents tended to close triads. Residents who were not previously connected tended not to affirm the same peers. Residents showed homophily by entry cohort. Other results were inconsistent across TC units. Within a monthly time-frame participants showed homophily by graduation status. They showed the same patterns of triadic closure when connected, tendency not to affirm the same peers when not connected and homophily by cohort entry time as in a weekly time frame. ConclusionsTCs leverage three human tendencies to bring about change. The first is the tendency of cooperators to work together, in this case in seeking graduation. The second is the tendency of people to build clusters. The third is homophily, in this case by cohort entry time. Consistent with TC clinical theory, residents spread affirmations to a variety of peers when they have no previous connection. This suggests that residents balance network clustering with a concern for the community as a whole.