Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 761: How do Interactions Influence Formation of Social Networks? A General Microfounded Explanation

Andreas Nordvall Lagerås () and David Seim ()
Additional contact information
Andreas Nordvall Lagerås: Department of Mathematics, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
David Seim: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: This paper investigates the strategic interaction effects that precede network formation. We find that for a general class of payoff functions which, among other things, feature strict supermodularity, the degree of a node is a sufficient statistic for the action it undertakes. Dynamically, we construct a general model where each period consists of two stages: first, a game on the given network is played and second, a link is either created or severed. It turns out that the payoff functions we consider give absolute convergence to the absorbing class of networks called nested split graphs. These networks do not only possess mathematically tractable characteristics, but we can also interpret real-world networks as perturbed nested split graphs. The general framework provided here can be applied to more or less complex models of network formation.

Keywords: social networks; network formation; supermodularity; social interaction

JEL-codes: C60; D00; D85; Z13

25 pages, September 8, 2009

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