Core and periphery in networks

We study a model of network formation where the bene…ts from connections exhibit decreasing returns and decay with network distance. We show that the unique equilibrium network is a periphery-sponsored star, where one player, the center, maintains no links and earns a high payo¤, while all other players maintain a single link to the center and earn lower payo¤s. Both the star architecture and payo¤ inequality are preserved in an extension of the model where agents can make transfers and bargain over the formation of links, under the condition that the surplus of connections increases in the size of agents’neighborhoods. Our model thus generates two common features of social and economic networks: (1) a core-periphery structure; (2) positive correlation between network centrality and payo¤s. JEL Classi…cation: A14, C72