Feb 02, 2010 Filed in: Work in progress
With Nageeb Ali
Abstract: We endogenize social network formation and collective enforcement using a model in which players interact bilaterally and repeatedly along costly links. Players observe only their own partners' actions, so collective punishments that support cooperation must spread endogenously through the network, as a contagion. Our model features asynchronous interaction, variable stakes in each relationship, and transferable utilities. With these properties, for any network there exists a contagion equilibrium in which incentive constraints bind along the equilibrium path. Among symmetric networks, the optimal network topology in a large society features many identical, independent cliques. We conjecture that such a network is also Pareto optimal among all (symmetric and asymmetric) networks. Our results formalize the notion that when collective enforcement is decentralized, the level of social cooperation, or "social capital," is maximized in tight-knit, highly clustered groups.
Working paper coming soonPermalink