Working Paper: NBER ID: w21758
Authors: Margherita Comola; Marcel Fafchamps
Abstract: We design a laboratory experiment to investigate bilateral link formation in a setting where payoffs are pair-specific. Our link formation rule is decentralized and players can make link offers and counter-offers, as in a Beckerian marriage market. The game is designed in such a way that a stable equilibrium configuration exists and does not depend on conditions such as initial configuration or order of move. We test whether the theoretical equilibrium is obtained under experimental conditions, and which individual motivations and decision-making techniques lead players to depart from myopic best response. We find that players are remarkably good at attaining a stable equilibrium configuration, which happens in 86% of the games. Results show that complete information speeds up the game via self-censoring, and that sub-optimal choices are mostly driven by over-thinking behavior and reluctance to accept to link with players who have been disloyal earlier in the game.
Keywords: Decentralized Markets; Link Formation; Experimental Economics
JEL Codes: D03; D49; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| availability of complete information (D83) | speed of convergence (C69) |
| overthinking behavior (D91) | suboptimal choices (D91) |
| reluctance to accept links with previously disloyal players (C71) | suboptimal choices (D91) |
| initial network configuration (D85) | convergence rates (O47) |
| starting with randomly assigned links (C90) | convergence rates (O47) |
| convergence to SPS equilibrium (C62) | stable equilibrium configuration (C62) |
| SPS equilibrium not reached (D50) | SPS links still formed (Y80) |