Endogenous Network Formation and the Provision of a Public Good

The way people form groups when facing a coordination problem poses an interesting question. This paper addresses the issue of what type of clubs are formed when players must play a public goods game with the other players belonging to their club. I use a two-stage approach to separate network decisions and public goods decisions and apply farsighted stability to characterize the network structures that emerge and persist as a result of this sequence of stages. It is possible to establish criteria based on the player size and network parameters for determining the elements of two types of stable solution sets: basins of attraction and the path dominance core. Both solution sets provide predictions for the types of clubs that will form within the defined framework. JEL classification: C71; D20; H41 †Department of Economics, Indiana University, Wylie Hall 105, 100 S. Woodlawn, Bloomington IN. 47405. Email: [email protected]. Committee Chair: Frank H. Page, Jr. Committee Members: Robert Becker and Gerhard Glomm. 1