We report on an extensive series of highly controlled human subject experiments in networked trade. Our point of departure is a simple and well-studied bipartite network exchange model, for which previous work has established a detailed equilibrium theory relating wealth to network topology. A notable feature of this theory is its prediction that there may be significant local variation in equilibrium wealths and prices purely as a result of structural asymmetries in the network. Our experiments mix recent lines of thought from algorithmic game theory, behavioral economics and social network theory, and are among the first and largest behavioral economics experiments on network effects conducted to date. They continue a line of human subject experiments on networked games and optimization allowing only local interactions.

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Recently, there has been an increasing interest in how strategic action influences network structure. Motivated by the widespread belief that ‘networks matter’ in the process of reaching personal objectives, it is a natural assumption that rational actors will try to strategically arrange their ties in order to optimize their expected utility. Starting from the notion that there exist rival theories on what the best strategy is to form linkages and that the applicability of these theories varies across social contexts, we will examine how (groups of) actors change their networks in order to reach better positions. Theoretical results predict that emerging networks are to a large extent contingent on the social context and the adjacent behavior actors follow to choose their relations in such a context. Experiments will be used to test this conjecture.

In developing countries, whenever formal economic and financial institutions lack strength, households are forced to rely on risk sharing and other informal arrangements based on pre-existing interpersonal relationships. This paper takes a network perspective to investigate how rural households form the links through which they provide and/or get economic support, and whether the connection structure of the community affects the formation of these links. I test the hypothesis that indirect contacts matter, that is, agents take into account not only potential partners’ characteristics, but also their position with respect to all other agents. A network formation framework with fully heterogeneous agents is first presented, following Jackson and Wolinsky (1996), an estimation procedure is then proposed and applied to data on a village in rural Tanzania. Results show that when agents evaluate the net advantage of forming a link they also consider the relative position and the wealth of indirect partners. My paper contributes to both network theory and the literature on risk sharing arrangements in that it proposes an innovative procedure to estimate endogenous network formation models, and provides evidence that network structure has an explanatory value disregarded by all previous studies, which are focused on direct relations only.

Bank of Canada discussion papers are completed research studies on a wide variety of technical subjects relevant to central bank policy. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada.

There are many situations in which a customer’s proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. We model these situations as games in which firms compete for customers located in a “social network”. Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous.

If universities expose students to a more diverse set of peers, do students form more diverse social networks in subsequent interactions? We address this question by exploiting unique data on social contacts from Facebook for a university that randomly assigns students to dormitories. We find that the exposure to members of a different race increases the number of different race friends in the dorm environment, but does not increase the diversity of social networks outside that environment.

The paper investigates how buyer-supplier firm-specific relationships affect security prices. Starting from the empirical inconsistencies in some standard structural models we propose a structural model of firm dependence in a vertically connected network of firms based on cash flow transfers between the buyers and the suppliers. A closed econ-omy network completeness depends only on the topology of the network. We develop analytical formulas for corporate debt, credit default swaps and collateralized debt obli-gations. We prove that network disintegration does not necessarily reduce corporate and portfolio yields. In fact, it can raise them if the externally generated cash flows and internal network flows are positively correlated. 2 1

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Social and economics networks have not only attracted substantial research but have also been the subject of popular books [Gladwell 2002; Barabasi 2003]. Networks are ubiquitous with the presence of different kinds of social, economic and information networks around us. The internet, a major source of source of commerce and