Economic Theory Seminar Series: The formation of partnerships in social networks (co-authored with Bhaskar Dutta, Stephane Robin and Min Zhou)

This paper analyzes the formation of partnerships in social networks. Agents randomly request favors and turn to their neighbors to form a partnership where they commit to provide the favor when requested. If favors are costly, agents have an incentive to delay the formation of the partnership. In that case, we show that for any initial social network, the unique Markov Perfect equilibrium results in the formation of the maximum number of partnerships when players become infinitely patient. If favors pro- vide benefits, agents rush to form partnerships at the cost of disconnecting other agents and the only perfect initial networks for which the maximum number of partnerships are formed are the complete and complete bipartite networks. The theoretical model is tested in the lab. Experimental results show that a large fraction of the subjects (75%) play according to their subgame perfect equilibrium strategy and reveals that the ef- ficient maximum matching is formed over 78% of the times. When subjects deviate from their best responses, they accept to form partnerships too early. The incentive to accept when it is optimal to reject is positively correlated with subjects’ risk aversion, and players employ simple heuristics – like the presence of a captive partner – to decide whether they should accept or reject the formation of a partnership.