The Stability and Efficiency of Economic and Social Networks

This paper studies the formation of networks among individuals. The focus is on the compatibility of overall societal welfare with individual incentives to form and sever links. The paper reviews and synthesizes some previous results on the subject, and also provides new results on the existence of pairwise-stable networks and the relationship between pairwise stable and efficient networks in a variety of contexts and under several definitions of efficiency. ∗HSS 228-77, California Institute of Technology, Pasadena, California 91125, USA, [email protected] and http://www.hss.caltech.edu/∼jacksonm/Jackson.html. This paper is partly based on a lecture given at the first meeting of the Society for Economic Design in Istanbul in June 2000. I thank Murat Sertel for affording me that opportunity, and Semih Koray for making the meeting a reality. I also thank the participants of SITE 2000 for feedback on some of the results presented here. I am grateful to Gabrielle Demange, Bhaskar Dutta, Alison Watts, and Asher Wolinsky for helpful conversations.