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Volume 9, Issue 3

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Reciprocal Equilibria in Link Formation Games

Salonen, Hannu

Year: 2015   Volume: 9   Issue: 3   Pages: 169-183

Abstract: We study non-cooperative link formation games in which players have to decide how much to invest in relationships with other players. A link between two players is formed, if and only if both make a positive investment. The cost of forming a link can be interpreted as the value of privacy. We analyze the existence of pure strategy equilibria and the resulting network structures with tractable specifications of utility functions. Sufficient conditions for the existence of reciprocal equilibria are given and the corresponding network structure is analyzed. Pareto optimal and strongly stable network structures are studied. It turns out that such networks are often complete.

JEL classification: C72, D43

Keywords: Link formation games, reciprocal equilibrium, complete network

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