Stability and Competitive Equilibrium in Trading Networks

We introduce a model in which agents in a network can trade via bilateral contracts. We find that when continuous transfers are allowed and utilities are quasilinear, the full substitutability of preferences is sufficient to guarantee the existence of stable outcomes for any underlying network structure. Furthermore, the set of stable outcomes is essentially equivalent to the set of competitive equilibria, and all stable outcomes are in the core and are efficient. In contrast, for any domain of preferences strictly larger than that of full substitutability, the existence of stable outcomes and competitive equilibria cannot be guaranteed. ∗Graduate School of Business, Stanford University; [email protected]. †Becker Friedman Institute, University of Chicago; [email protected]. ‡Department of Economics, University of St. Andrews; [email protected]. §Graduate School of Business, Stanford University; [email protected]. ¶Economics Department, University of Bonn; [email protected].