Advances in Strategic Network Formation

Imagine a world where everybody is calculative in building relationships. In this book I model such a scenario and ask how this behavior affects the structure of social networks. Applications include friendship networks, personal business networks, R&D collaborations, strategic alliances, and trade among countries. After discussing the formal modeling approach, I put a focus on two types of linking goals. One is the gain of access to information and support by having many other actors in close reach; the other one is the bargaining position that is attained by being a broker for others. It turns out that the interaction of two goals leads to non-trivial dynamics of the network structure. Moreover, it can be observed that a typical feature of friendship networks is destroyed by incentives for advantageous network positions. Finally, I turn to a focal problem in strategic network formation: there is a general conflict between stability, based on individual interest, and efficiency, based on collective welfare. I study the sources of inefficiency by analyzing the external effects of link formation.