Pairwise stability Jackson and Wolinsky [1996] is the standard stability concept in network formation. It assumes myopic behavior of the agents in the sense that they do not forecast how others might react to their actions. Assuming that agents are perfectly farsighted, related stability concepts have been proposed.We design a simple network formation experiment to test these extreme theories, but find evidence against both of them: the subjects are consistent with an intermediate rule of behavior, which we interpret as a form of limited farsightedness. On aggregate, the selection among multiple pairwise stable networks (and the performance of farsighted stability) crucially depends on the level of farsightedness needed to sustain them, and not on efficiency or cooperative considerations. Individual behavior analysis corroborates this interpretation, and suggests, in general, a low level of farsightedness (around two steps) on the part of the agents.JEL classification: D85, C91, C92
We take school admission mechanisms to the lab to test whether the widely-used manipulable Boston-mechanism disadvantages students of lower cognitive ability and whether this leads to ability segregation across schools. Results show this is the case: lower ability participants receive lower payoffs and are over-represented at the worst school. Under the strategy-proof Deferred Acceptance mechanism, payoff differences are reduced, and ability distributions across schools harmonized. Hence, we find support for the argument that a strategy-proof mechanisms "levels the playing-field". Finally, we document a trade-off between equity and efficiency in that average payoffs are larger under Boston than under Deferred Acceptance.
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