Theoretical Economics, 12, 2017, 1057-1087.
I propose a simple model of signed network formation, where agents make friends to extract payoffs from weaker enemies. The model thereby accounts for the interplay between friendship and alliance on one hand and enmity and antagonism on the other. Nash equilibrium configurations are such that either everyone is friends with everyone or agents can be partitioned into different sets, where agents within the same set are friends and agents in different sets are enemies. Any strong Nash equilibrium must be such that a single agent is in an antagonistic relationship with everyone else. Furthermore, I show that Nash equilibria cannot be Pareto ranked. This paper offers a game-theoretic foundation for a large body of work on signed networks, called structural balance theory, which has been studied in sociology, social psychology, bullying, international relations, and applied physics. The paper also contributes to the literature on contests and economics of conflict.
Games and Economic Behavior, 105, 2017, 349-367.
This paper presents a model of strategic network formation with local complementarities in effort levels and positive local externalities. Results are obtained for a general class of payoff functions, which subsumes the linear-quadratic specification frequently used in theoretical and applied work. We assume homogeneous agents and characterize equilibria for two-sided and one-sided link formation. (Pairwise) Nash equilibrium networks are nested split graphs, which are a strict subset of core-periphery networks. We highlight the relevance of the convexity of the value function for obtaining these structures. More central agents are shown to exert more effort and obtain higher gross payoffs in equilibrium. However, net of linking cost, central agents may obtain strictly lower net payoffs. The curvature of the value function is also important for efficiency considerations. These findings are relevant for many social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms. relations, and applied physics.