On the formation of interaction networks in social coordination games

There are many situations where two interacting individuals can benefit from coordinating their actions. We examine the endogenous choice of partners in such social coordination games and the implications for resulting play. We model the interaction pattern as a network where individuals periodically have the discretion to add or sever links to other players. With such endogenous interaction patterns we see multiple stochastically stable states of play, including some that involve play of equilibria in the coordination game that are neither efficient nor risk dominant. Thus the endogenous network structure not only has implications for the interaction pattern that emerges, but it also has a significant impact on the play in the coordination game relative to what would arise if the same interaction network were exogenous. Journal of Economic Literature Classification Numbers: A14, D20, J00. Humanities and Social Sciences 228-77, Caltech, Pasadena, CA 91125, USA ([email protected]) Department of Economics, Box 1819, Station B, Vanderbilt University, Nashville, TN 37235, USA ([email protected]) 1 We thank Jeff Ely for a helpful conversation and Sanjeev Goyal for comments on an earlier draft. We also thank the associate editor and an anonymous referee for suggestions that led us to expand the scope of the paper. Helpful comments and discussion by the participants at SITE are gratefully acknowledged.