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Experiments with Network Formation



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Experiments with Network Formation Dean Corbae Department of Economics University of Texas at Austin E mail corbae eco utexas edu John Du y Department of Economics University of Pittsburgh E mail jdu y pitt edu This Draft August 2007 Abstract We examine how groups of agents form trading networks in the presence of idiosyncratic risk and the possibility of contagion Specifically in our model four agents play a two stage finitely repeated game In the first stage the network structure is endogenously determined in a noncooperative proposal game In the second stage agents play multiple rounds of a coordination game against all of their chosen neighbors after the realization of a payo relevant shock While parsimonious our four agent environment is rich enough to capture all of the important interaction structures that have appeared in the networks literature including bilateral marriage local interaction wheel star and uniform matching complete networks Marriage is not only the ex ante e cient network in our environment but also stable in the sense of being immune to unilateral deviations Since our framework admits multiple equilibria we further examine which types of networks are likely to emerge in an experiment that start subjects out in various symmetric networks but then allows them to endogenously form networks Consistent with our theory marriage networks are the most frequent and stable network structures once a marriage network is endogenously implemented by subjects it remains in place for the duration of a session Further the distribution of network structures is significantly di erent from that which would result from random link proposals and payo e cieny in the second stage coordination game is high at around 90 percent of the predicted level We conclude that our experimental findings provide support for our theoretical predictions Key Words Networks Contagion Coordination Stability Experimental Economics JEL Codes C72 C92 D85 We wish to thank Andreas Blume



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