Core and Periphery in Endogenous Networks

Many economic and social networks share two common organizing features: (1) a coreperiphery structure; (2) positive correlation between network centrality and payo¤s. In this paper, we build a model of network formation where these features emerge endogenously. In our model, the unique equilibrium network architecture is a periphery-sponsored star. In this equilibrium, one player, the center, maintains no links and achieves a high payo¤, while all other players maintain a single link to the center and achieve lower payo¤s. With heterogeneous groups, equilibrium networks are interconnected stars. We show that small minorities tend to integrate while large minorities are self-su¢ cient. Although any player can be the center in a static equilibrium, evolution selects the agent with most valuable resources as the center in the long run. In particular, even small inequalities in resources can lead to large payo¤ inequality because of the endogenous social structure. Our main results are robust to the introduction of transfers and bargaining over link costs. JEL Classi…cation: A14, C72, C73