A Strategic Model of Social and Economic Networks
TL;DR: In this article, the authors study the stability and efficiency of social and economic networks when self-interested individuals can form or sever links, and show that there does not always exist a stable network that is efficient.
About: This article is published in Journal of Economic Theory.The article was published on 1996-10-01 and is currently open access. It has received 2660 citations till now. The article focuses on the topics: Strategic Network Formation & Network formation.
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TL;DR: In this article, the authors develop one of perhaps multiple specifications of embeddedness, a concept that has been used to refer broadly to the contingent nature of economic action with respect to cognition, social structure, institutions, and culture.
Abstract: This chapter aims to develop one of perhaps multiple specifications of embeddedness, a concept that has been used to refer broadly to the contingent nature of economic action with respect to cognition, social structure, institutions, and culture. Research on embeddedness is an exciting area in sociology and economics because it advances understanding of how social structure affects economic life. The chapter addresses propositions about the operation and outcomes of interfirm networks that are guided implicitly by ceteris paribus assumptions. While economies of time due to embeddedness have obvious benefits for the individual firm, they also have important implications for allocative efficiency and the determination of prices. Under the conditions, social processes that increase integration combine with resource dependency problems to increase the vulnerability of networked organizations. The level of investment in an economy promotes positive changes in productivity, standards of living, mobility, and wealth generation.
9,137 citations
TL;DR: In this article, the role of social learning in the diffusion of a new agri cultural technology in Ghana is investigated, using unique data on farmers' communication patterns to define each individual's information neighborhood, finding evidence that farmers adjust their inputs to align with those of their information neighbors who were surpris ingly successful in previous periods.
Abstract: This paper investigates the role of social learning in the diffusion of a new agri cultural technology in Ghana. We use unique data on farmers' communication patterns to define each individual's information neighborhood. Conditional on many potentially confounding variables, we find evidence that farmers adjust their inputs to align with those of their information neighbors who were surpris ingly successful in previous periods. The relationship of these input adjustments to experience further indicates the presence of social learning. In addition, applying the same method to input choices for another crop, of known technol ogy, correctly indicates an absence of social learning effects. (JEL D83, 013, 033, Q16)
1,954 citations
TL;DR: In this article, the authors identify job networks among Mexican migrants in the U.S. labor market and verify that the same individual is more likely to be employed and to hold a higher paying nonagricultural job when his network is exogenously larger, by including individual fixed effects in the employment and occupation regressions.
Abstract: This paper attempts to identify job networks among Mexican migrants in the U. S. labor market. The empirical analysis uses data on migration patterns and labor market outcomes, based on a sample of individuals belonging to multiple origin-communities in Mexico, over a long period of time. Each community's network is measured by the proportion of the sampled individuals who are located at the destination (the United States) in any year. We verify that the same individual is more likely to be employed and to hold a higher paying nonagricultural job when his network is exogenously larger, by including individual fixed effects in the employment and occupation regressions and by using rainfall in the origin-community as an instrument for the size of the network at the destination.
1,738 citations
TL;DR: An approach to network formation based on the notion that social networks are formed by individual decisions that trade off the costs of forming and maintaining links against the potential rewards from doing so to formulate the network formation process as a noncooperative game.
Abstract: We present an approach to network formation based on the notion that social networks are formed by individual decisions that trade off the costs of forming and maintaining links against the potential rewards from doing so. We suppose that a link with another agent allows access, in part and in due course, to the benefits available to the latter via his own links. Thus individual links generate externalities whose value depends on the level of decay/delay associated with indirect links. A distinctive aspect of our approach is that the costs of link formation are incurred only by the person who initiates the link. This allows us to formulate the network formation process as a noncooperative game.
1,407 citations
TL;DR: In this article, the authors provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk, and show that financial contagion exhibits a form of phase transition as interbank connections increase.
Abstract: We provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more "complete" interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network.
1,187 citations
References
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TL;DR: In this article, the authors studied the relationship between college admission and the stability of marriage in the United States, and found that college admission is correlated with the number of stable marriages.
Abstract: (2013). College Admissions and the Stability of Marriage. The American Mathematical Monthly: Vol. 120, No. 5, pp. 386-391.
5,655 citations
TL;DR: In this article, the authors discuss the dynamics of consumer adoption decisions in the presence of network effects, competition between incompatible systems, and how suppliers choose which components are compatible and which are not.
Abstract: This paper discusses firm behavior, market performance, and the public and private institutions that arise in systems markets, i.e., markets where consumers use compatible components together to generate benefits. In such markets, which include communications networks and 'hardware/software' networks, popular products are inherently more valuable. These 'network effects' can drive corporate strategies and are critical in understanding innovation in many high-technology markets. The discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects, competition between incompatible systems, and how suppliers choose which components are compatible and which are not.
2,413 citations
"A Strategic Model of Social and Eco..." refers background in this paper
...Second, occasional contributions to microeconomic theory have used network structures for such diverse issues as the internal organization of firms (e.g., Boorman [2], Keren and Levhari [16]), employment search (Montgomery [18]), systems compatibility (see Katz and Shapiro [15]), information transmission (Goyal [5]), and the structure of airline routes (Hendricks, et al. [7, 8], Starr and Stinchcombe [26])....
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..., Boorman [2], Keren and Levhari [16]), employment search (Montgomery [18]), systems compatibility (see Katz and Shapiro [15]), information transmission (Goyal [5]), and the structure of airline routes (Hendricks, et al....
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TL;DR: Graph-theoretic ideas are used to analyze cooperation structures in games, and fair allocation rules are proven to be unique, closely related to the Shapley value, and stable for a wide class of games.
Abstract: Graph-theoretic ideas are used to analyze cooperation structures in games. Allocation rules, selecting a payoff for every possible cooperation structure, are studied for games in characteristic function form. Fair allocation rules are defined, and these are proven to be unique, closely related to the Shapley value, and stable for a wide class of games.
1,415 citations
"A Strategic Model of Social and Eco..." refers background in this paper
...This direction was first studied by Myerson [ 19 ], and then by Owen [22], van den Nouweland and Borm [21], and others (see van den Nouweland [20] for a detailed survey)....
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...Proof of Theorem 4. Myerson’s [ 19 ] proof shows that there is a unique...
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...and Zemel [14]), and games with communication structures (Aumann and Myerson [1], Kalai et al. [13], Kirman et al. and Myerson [ 19 ])....
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...The following theorem is an easy extension of a result by Myerson [ 19 ]....
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...14 Such an allocation rule, in a different setting, is called the ‘‘fair allocation rule’’ by Myerson [ 19 ]....
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1,255 citations
"A Strategic Model of Social and Eco..." refers background in this paper
...Keren and Levhari [16]), employment search (Montgomery [ 18 ]),...
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01 Jan 2002
TL;DR: In this paper, the authors used a generalized Nash bargain to analyze input levels, profits, and wages in the absence of binding contracts, and compared these with the convenitional binding contracts model.
Abstract: The paper uses a generalized Nash bargain to analyze input levels, profits, and wages in the absence of binding contracts, and compares these with the convenitional binding contracts model. It is shown that if the union has any power, investment is lower in the absence of binding contracts. The associated input levels and shareholders' profits are identical to those that emerge if contracts are binding and the firm acts as if it faces a cost of capital which is a linear combination of the purchase price of capital and the resale value. This implicit cost is greater than the purchase price, is an increasing function of union power, and is independent of the profit function and the alternative wage. Increases in union power reduce shareholders' profits but may increase wages at some points and decrease wages at others. In the absence of binding contracts, shareholders' profits are lower but there is a critical level of union power (depending on the profit function) such that the union is worse off if its power is higher than this level and better off if it is lower.
790 citations