Abstract

We study the stability and efficiency of social and economic networks, when selfinterested individuals can form or sever links. First, for two stylized models, we characterize the stable and efficient networks. There does not always exist a stable network that is efficient. Next, we show that this tension persists generally: to assure that there exists a stable network that is efficient, one is forced to allocate resources to nodes that are not responsible for any of the production. We characterize one such allocation rule: the equal split rule, and another rule that arises naturally from bargaining of the players. Journal Economic Literature Classification

Citations