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Connections: An Introduction to the Economics of Networks

Sanjeev Goyal
Copyright Date: 2007
Edition: STU - Student edition
Pages: 304
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  • Book Info
    Book Description:

    Networks pervade social and economic life, and they play a prominent role in explaining a huge variety of social and economic phenomena. Standard economic theory did not give much credit to the role of networks until the early 1990s, but since then the study of the theory of networks has blossomed. At the heart of this research is the idea that the pattern of connections between individual rational agents shapes their actions and determines their rewards. The importance of connections has in turn motivated the study of the very processes by which networks are formed.

    InConnections, Sanjeev Goyal puts contemporary thinking about networks and economic activity into context. He develops a general framework within which this body of research can be located. In the first part of the book he demonstrates that location in a network has significant effects on individual rewards and that, given this, it is natural that individuals will seek to form connections to move the network in their favor. This idea motivates the second part of the book, which develops a general theory of network formation founded on individual incentives. Goyal assesses the robustness of current research findings and identifies the substantive open questions. Written in a style that combines simple examples with formal models and complete mathematical proofs,Connectionsis a concise and self-contained treatment of the economic theory of networks, one that should become the natural source of reference for graduate students in economics and related disciplines.

    eISBN: 978-1-4008-2916-3
    Subjects: Economics, Marketing & Advertising

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Acknowledgements
    (pp. ix-xii)
  4. 1 Introduction
    (pp. 1-8)

    I buy a new computer every few years. A computer is a sophisticated product and there are a number of different options open to me. To make an informed choice, I personally gather information on the different brands and models available—by going on the World Wide Web, visiting computer shops, and reading computer magazines—and I talk to my colleagues and friends to get tips about the different brands available. The time and effort I personally spend in collecting information depend very much on how well-informed my friends and colleagues are: if they are well-informed, then I rely upon...

  5. 2 Networks: Concepts and Empirics
    (pp. 9-24)

    The first aim of this chapter is to present the principal concepts relating to networks which will be used in this book. This presentation in section 2.2 will draw upon work carried out in the theory of graphs, in mathematical sociology, and in statistical physics. The study of networks has a rich and distinguished tradition in each of these subjects and there are a number of excellent books available. The exposition below borrows heavily from Harary (1969), Bollobás (1998), and Wasserman and Faust (1994).

    The second aim of this chapter is to discuss these concepts in relation to empirically observed...

  6. 3 Games on Networks
    (pp. 25-62)

    Casual observation as well as introspection suggests that our behavior is influenced significantly by the actions of our neighbors, friends, and acquaintances. The behavior of our friends is influenced by their friends, whose behavior is in turn influenced by the behavior of their friends, and so on. We are thus led to the view that individual behavior is shaped by the entire structure of relationships that obtain in a social or economic context. The aim of this chapter is to develop a framework within which the effects of the structure of relationships on individual behavior and well-being as well as...

  7. 4 Coordination and Cooperation
    (pp. 63-86)

    Social coordination and cooperation are two recurring themes in the study of strategic interaction and an important reason for this is that they arise in both social and economic contexts. The problem of coordination arises in its simplest form when, for an individual, the optimal course of action is to conform to what others are doing. The following three examples illustrate how coordination problems arise naturally in different walks of life.

    (i)Adoption of new information technology.Individuals decide on whether to adopt a fax machine without full knowledge of its usefulness. This usefulness depends on the technological qualities of...

  8. 5 Social Learning
    (pp. 87-112)

    We often have to choose among alternatives without knowing their relative advantages. In arriving at a decision we make use of our past experience as well as the experience of others, especially those who arecloseto us. Two individuals may be said to be close if they know each other very well or if they have several common acquaintances. This type of closeness is important because the costs of communication with close acquaintances or friends are lower and also because an individual may find it easier to trust someone whom he knows. A second possible interpretation of “closeness” is...

  9. 6 Social Networks in Labor Markets
    (pp. 113-142)

    Workers like jobs that suit their skills and location preferences, while firms are keen to hire workers who have the right abilities. However, workers do not know which firms have vacancies, and finding the right job takes time and effort. Similarly, firms do not know which workers are looking for a job. Faced with this lack of information, workers look for job advertisements in newspapers, magazines, and online. They also spread the word among their friends and acquaintances that they are looking for a job, and indeed there is substantial evidence that they often get information on job vacancies via...

  10. 7 Strategic Network Formation: Concepts
    (pp. 143-162)

    The first part of the book argued that the network structure has profound effects on individual behavior and payoffs as well as on aggregate social outcomes. In particular, we observed that individuals occupying certain positions in a network have access to substantial advantages. In the context of interfirm alliances, for instance, collaborations create cost advantages which increase market share and profits. Similarly, we found that in labor markets, two workers with the same ability would earn different wages depending on the number of their personal connections.¹ These advantages suggest that individual entities—firms, workers, managers, or countries—will have an...

  11. 8 One-Sided Link Formation
    (pp. 163-198)

    This chapter presents a theory of network formation in which players can form links unilaterally. Interest will center on the following model: there are 𝑛 individuals, each of whom can form a link with any subset of the remaining players. Link formation is unilateral: an individual 𝒊 can decide to form a link with any player 𝒋 by paying for the link. While there are some interesting practical examples of this type of link formation—such as forming links across Web pages, citations, telephone calls, the sending of gifts in the context of social relations—it must be emphasized that...

  12. 9 Two-Sided Link Formation
    (pp. 199-244)

    In many social and economic contexts the creation of a link between two individuals requires that both agree to the link; familiar examples of this include friendships, coauthorships in research papers, collaboration between firms, ties between buyers and sellers, and free trade agreements between nations. The possibility of individuals deliberately forming links and shaping the network to their own ends gives rise to the following three classical questions. What is the architecture of the resulting networks? Are these networks socially efficient? What are the distributional properties of the networks that arise? The aim of this chapter is to show how...

  13. 10 Research Collaboration among Firms
    (pp. 245-270)

    Research collaboration among firms takes a variety of forms, such as joint ventures, technology sharing, cross licensing, and joint R&D. In recent years, joint R&D has become especially prominent.¹ Moreover, a general feature of research collaboration is that firms enter into different projects with nonoverlapping sets of partners. Thus it is natural to represent collaboration relations as a network. Empirical work shows that the networks of collaboration links exhibit several striking features: the average degree is relatively small (compared with the total number of firms), the degrees are unequally distributed, the architectures resemble a core–periphery network, and the average...

  14. References
    (pp. 271-284)
  15. Index
    (pp. 285-289)