Relationship Externalities

30 Pages Posted: 24 Jun 2020 Last revised: 3 Oct 2022

See all articles by Selman Erol

Selman Erol

Carnegie Mellon University - David A. Tepper School of Business

Rakesh Vohra

University of Pennsylvania - Department of Economics

Date Written: October 3, 2022

Abstract

We propose a model of network formation where agent’s payoffs depend on the connected component they belong to in a way that is specific enough to be tractable yet general enough to accommodate a number of economically relevant settings. Among them are formation in the presence of contagion via links and collaboration with spillovers. A key feature of this setting is that the externalities stem from links rather than nodes. We characterize stable and efficient networks. Under negative externalities, disjoint cliques are stable and efficient. Under positive externalities complete networks and star networks are stable. Efficient networks feature a mix: pineapple networks which consist of one large clique and a star network appended to each other.

Keywords: Network Formation, Stability, Strong Stability, Externalities

JEL Classification: D62, D85

Suggested Citation

Erol, Selman and Vohra, Rakesh, Relationship Externalities (October 3, 2022). Available at SSRN: https://ssrn.com/abstract=3614871 or http://dx.doi.org/10.2139/ssrn.3614871

Selman Erol (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Rakesh Vohra

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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