Myopic and farsighted stability in network formation games: an experimental study

Abstract

We test the performance of myopic and farsighted stability concepts in a network formation experiment with a stream of payoffs and relatively unstructured link formation process. A subtle treatment variation demonstrates clearly the power of myopic stability concepts in precisely identifying the set of the most stable networks. However, we also find support for the predictions of farsighted concepts of stability, especially those that assume players' pessimism about the eventual outcome of a deviation. This is the first study to demonstrate that there exist environments where farsighted stability concepts identify empirically stable networks that are not identified by myopic concepts. Thus, myopic stability concepts are not necessarily sufficient to predict all stable outcomes in empirical applications.Network interactions involving a regular flow of payoffs feature in many social and economic environments. For example, the export profits of a firm, a bank's risk exposure and associated returns, and the number of papers published by academic researchers depend, respectively, on the network of trade partners (Chaney 2014), the credit and debit relationships among banks (Iori et al. 2008;Martinez-Jaramillo et al. 2014), and the constellation of co-authors (Liu et al. 2011;Ozel 2012) in place at a given point in time. The importance attached to social and professional networks is shown by the popularity of websites such as LinkedIn, Xing, and ResearchGate. The prevalence of situations in which people and firms are concerned with benefits and losses that they derive from their ongoing relationships makes it desirable to understand which network structures in these environments are stable and thus likely to be observed.Many theories have been proposed to predict the stable outcomes of network formation games. As the relationships we are interested in are those where "it takes two to tango", we restrict attention to theories that assume bilateral, or pairwise link formation, where links require the consent of both parties to form, and can be broken unilaterally. Within this approach, we focus on the large and prominent group of cooperative stability concepts, which analyse network stability by describing the conditions that stable networks should satisfy and do not rely on a particular network formation protocol. As we describe in more detail later, these stability concepts can be broadly divided into three classes, assuming myopic, farsighted, or cautious farsighted behaviour. The purpose of this study is to identify which of these classes of concepts best describes the outcomes of network formation in an environment with a flow of payoffs, focusing on the empirical relevance of farsighted and cautious farsighted concepts. 1 We compare the predictive power of pairwise myopic, farsighted, and cautious farsighted stability concepts in a laboratory experiment, implementing two different three-player network formation games. The experiment has three important features. First, it is novel in that it enables the clear ide...

Contracting Mechanisms for Stable Sourcing Networks

“…Further, a recent study used behavioral lab experiments to consider myopic and farsighted stability in network formation games (Teteryatnikova and Tremewan 2020). The study finds evidence to support both types of stability behavior, but the results also indicate that the most stable networks are those predicted by myopic stability (such as the core).…”

Myopic-farsighted absorbing networks

“…4 Recent experiments provide evidence in favour of a mixed population consisting of both myopic and farsighted agents. See Kirchsteiger, Mantovani, Mauleon and Vannetelbosch (2016) and Teteryatnikova and Tremewan (2020).…”

Local farsightedness in network formation

“…Most of the players anticipate a number of reactions by the other players to the actions they take themselves. See also Teteryatnikova and Tremewan (2020). 3 A network is more farsightedly stable than another network if the set of farsighted defeating networks in the former is a proper subset of the set of farsighted defeating networks in the latter network.…”