Strategic Interaction and Networks

Rachel Kranton (Duke University, United States)

Geography and social links shape economic interactions. In industries, schools, and markets, the entire network determines outcomes. This paper analyzes a large class of games and obtains a striking result. Equilibria depend on a single network measure: the lowest eigenvalue. This paper is the first to uncover the importance of the lowest eigenvalue to economic and social outcomes. It captures how much the network amplifies agents’ actions. The paper combines new tools – potential games, optimization, and spectral graph theory – to solve for all Nash and stable equilibria and applies the results to R&D, crime, and the econometrics of peer effects.

Simultaneous Search and Network Efficiency 

Pieter Gautier (VU University Amsterdam)

When workers send applications to vacancies they create a network. Coordination frictions arise if workers do not know where other workers apply to and firms do not know which workers are considered by other firms. We show that these coordination frictions and the wage mechanism are not independent. Only wage mechanisms that allow for ex post competition generate the maximum matching on any realized network. Efficient network formation requires that identical firms face the same arrival rate of applicants. If firms make offers to workers, the resulting equilibrium is socially inefficient in terms of vacancy creation, worker participation and search intensity. However, if workers would make offers to firms, efficiency is obtained in all dimensions.