Network formation

Chenghong Luo
Ana Mauleon

with myopic and Vincent

Vannetelbosch

farsighted players Working Paper,

2018
  Part 1. Introduction to Pairwise
Stability and Efficiency
 1. Pairwise Stability
 2. Efficiency
 3. Conflict between Efficiency and
Outline Pairwise Stability

 Part 2. Network formation with

myopic and farsighted players
 1. Introduction to Farsightedness
 2. Myopic-Farsighted Network
  Players in the network
 Payoff or Utility function
, where represents the net benefit that i receives if network g is
in place
 Definition. A Pairwise Stable Network must satisfies two
conditions (i.e. mutual consent)
    (I)
 (II)

Pairwise  P is the set of pairwise stable networks.

Stability  Lemma 1. Always exists at least one pairwise stable network

or a closed cycle of networks.
 A network is pairwise stable if and only if it is not defeated
by an adjacent network

Yes Yes N No
o
Improving Path
  

 An improving path is a sequence of

distinct networks such that each
network with k<K is adjacent to and
defeated by the subsequent network
 Myopia: agents cannot forecast how
their actions might affect the evolution
of the process
Improving Cycle
 If
  no Pairwise Stable network exists, then
there must exist at least one
Improving Cycle
 It is a sequence of adjacent networks
such that each network defeats the
previous one and
 Cycle. It is a set of network such that it
exists a myopic improving path among
all of them.
 Closed Cycle. It is a set of network C
such that it does not exist a network �*∉�
in the improving path of �→�′.
  The best network is the one that maximizes the
total utility of the society
 A network g is efficient to a profile of utility
functions if

 A network g is Pareto efficient relative to if

  
Efficiency
 One network Pareto dominates another if it
leads to a weakly higher payoff for all individuals
and a strictly higher payoff for at least one.
 If g is Efficient relative to then it must also be
Pareto Efficient relative to , not vice versa
 Conflict
between
Stability and
Efficiency

Jackson, 2008
  IF a player i is connected to a player j by t links THEN player
i receives a benefit of b(t) from her undirected connection
 with
  player j (side payments)

Cost-benefit structure Network Efficiency Pairwise Stability Conflict

with only Myopic typology
players

Complete Unique Strongly Unique No

network

Distance- Star
Star
Network
Network
Unique
Unique Strongly
Strongly Not Unique
in
Yes
Yes

based Utility Empty

Network
Empty
Unique Strongly
Unique Strongly
Not Unique
Not Unique
Yes
Yes
Network
No links No Any Yes
or at least ( for
No links Any Yes
two links
or at least
per player
two links
per player Any No Yes
Any No Yes
Conflict between
Pairwise Stability
and Efficiency
with Distance-
based Utility

Jackson and Wolinsky, 1996

 Conflict between
Pairwise Stability
and Efficiency with
Distance-based
Utility

Jackson,2008 (p.165)
  Farsighted Players: forward-looking, no errors
 Farsighted Improving Path. Farsighted Players anticipate
further changes along the path and compare the ultimate
network to the current one (not necessarily a sequence of
adjacent networks)
 Farsightedly Pairwise Stable Network. If there is no
farsighted improving path from g to some other network g’,

Farsighted such that each pair of consecutive networks along the

sequence are adjacent.

Players  Farsightedly Strongly Stable. If there is no farsighted

improving path from g to some other network g’ (i.e. no
jumps).
 Existence of Farsightedly Pairwise Stable Network:
Consistent Set. All deviations away from the network are
expected to farsightedly lead back to some network in the
set that is not improving for the original deviating coalition.
Conflict between
Pairwise Stability
and Efficiency
 FARSIGHTED PLAYERS
 Form and delete links based on the improvement the end
network offers relative to the current network

Myopic-
MYOPIC PLAYERS
Farsighted
 Form and delete links based on the improvement the
Model resulting network offers relative to the current network

Only Pairwise deviations!!!

Empirical evidences of a mixed population

(Kirchsteiger, Mantovani, Mauleon, Vannetelbosch, 2006)
  From a network to a network , it is a finite
sequence of networks with and , either
 (I) Link deletion such that
 Myopic Player
 or
Myopic-  Farsighted Player

Farsighted   
 (II) Link creation such that
Improving  Myopic Players
 and
Path  Farsighted Players
 and
 Mixed link
 and with and i
  Definition. A Myopic-Farsighted Stable Set consists of all pairwise
stable network and one network from each closed cycle

 is the set of all network that can be reached from a network by a

myopic-farsighted path

  Definition. is a Myopic-Farsighted Stable Set if the two following

Myopic- conditions are satisfied:
 1. There are no myopic-farsighted improving paths between networks

Farsighted within the G set (Internal Stability)

Stable Set  2. There is a myopic-farsighted improving path from any network outside
the set to some network within the set (External Stability)

 
 
 
   
   
 PROPOSITION(1.1)

  Star Network
 Case:
 IF THEN
Results (1)  External Stable
 Internal Stable
  Case:
 Periphery: Farsighted players.

 Periphery: Myopic players.

 No incentive to delete links

Proposition(1.1)
    No incentive to add links
- Proof –
Internal Stability
 Centre: Myopic player.
 No incentive to delete link
  
Take , we build a myopic-farsighted improving path from to
some

Proposition(1.1)
- Proof –
External
Stability
 PROPOSITION(1.2)

  Case:
 The sufficient condition for having External Stability is

 Or
 with at least 2 Farsighted players we can observe only efficient
networks in the long run

COROLLARY

Results (2)   Case:

 IF THEN (star network)
 IF and THEN when a myopic-farsighted stable set exists G*
(star network) should be included in it

PROPOSITION(2)
 Case:
 
 IF and g is a star network THEN is a myopic-farsighted stable set,
but they are not necessarily the unique ones
  Main Result: resolution of conflict between
Stability and Efficiency
 Main Limit: Asymmetries/Heterogeneity in
Conclusion benefits and costs would imply that a conflict
between stability and efficiency could rise again
(transfers?)
Appendix
extra contents
  Assumption of perfect information/perception
 Pairwise Adjustments (no coalitions)

Observation  Transitivity of Preferences (existence of a utility

function)
s  Assumption of utility additivity (measure of
efficiency)
 What is
Farsightedn  Consistent with its multidimensional nature, empathy appears to

ess? be supported by a number of neural networks involving several

regions including frontal regions, the insula and temporal regions . 
 Emotional Empathy: ability supports our tendency to react
emotionally to the pain and distress of others and to recognize
their emotions.
 Cognitive Empathy: ability to engage in the cognitive process of
adopting another's psychological point of view.
 From “The neuropsychology of empathy: evidence from lesion studies” – Simone, Shamay, Tsoory -
in Revue de neuropsychologie 2015/4 (Volume 7), pages 237 à 243