Games on Endogenous Networks
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We study network games in which players both create spillovers for one another and choose with whom to associate. The endogenous outcomes include both the strategic actions (e.g., effort levels) and the network in which spillovers occur. We introduce a framework and two solution concepts that extend standard approaches – Nash equilibrium in actions and pairwise (Nash) stability in links. Our main results show that under suitable monotonicity assumptions on incentives, stable networks take simple forms. Our central conditions concern whether actions and links are strategic complements or substitutes, as well as whether links create positive or negative payoff spillovers. We apply our model to understand the consequences of competition for status, to microfound matching models that assume clique formation, and to interpret empirical findings that highlight unintended consequences of group design.
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