FEEM working papers "Note di lavoro" series
2007 .065

In Search of Stars: Network Formation among Heterogeneous Agents


Authors: Aljaž Ule, Jacob K. Goeree, Arno Riedl
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Network Formation,Experiment,Heterogeneity,Private Information
JEL n.: C72,C92,D82,D85
JEL: Games and Economic Behavior
Pages: Vol. 67, No. 2, pp. 445-466
Date: 11/2009

Abstract

This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the Bala-Goyal (2000) model of network formation with decay and two-way flow of benefits by allowing for agents with lower linking costs or higher benefits to others. Furthermore, agents’ types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a “star” structure. With homogeneous agents, equilibrium predictions fail completely. In contrast, with heterogeneous agents stars frequently occur, often with the high-value or low-cost agent in the center. Stars are not born but rather develop: with a high-value agent, the network’s centrality, stability, and efficiency all increase over time. Probit estimations based on best-response behaviour and other-regarding preferences are used to analyze individual linking behavior. Our results suggest that heterogeneity is a major determinant for the predominance of star-like structures in real-life social networks.

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