Working Paper: CEPR ID: DP8757
Authors: Juan D. Carrillo; Arya Gaduh
Abstract: We use a laboratory experiment to explore dynamic network formation in a six-player game where link creation requires mutual consent. The analysis of network outcomes suggests that the process tends to converge to the pairwise-stable (PWS) equilibrium when it exists and not to converge at all when it does not. When multiple PWS equilibria exist, subjects tend to coordinate on the high-payoff one. The analysis at the single choice level indicates that the percentage of myopically rational behavior is generally high. Deviations are more prevalent when actions are reversible, when marginal payoff losses are smaller and when deviations involve excessive links that can be removed unilaterally later on. There is, however, some heterogeneity across subjects.
Keywords: laboratory experiments; myopic rationality; pairwise stable equilibria; social networks
JEL Codes: C73; C92; D85
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Existence of PWS equilibria (C62) | Network formation process converges to PWS equilibrium (D85) |
| Multiple PWS equilibria exist (C62) | Subjects coordinate on high-payoff equilibrium (C72) |
| Subjects' strategic choices (C72) | Structure of the network (D85) |
| Deviations in behavior (D91) | Escape low-payoff equilibria (D59) |
| Marginal payoff losses smaller (D11) | Deviations in behavior (D91) |
| Link removal does not require mutual consent (H13) | Deviations in behavior (D91) |