Discrete Games in Endogenous Networks

I postulate that social norms and individuals’ behaviors are shaped by a common process capable of generating a multitude of outcomes. In games of friendship links and behaviors, I propose k-player Nash stability—a family of equilibria, indexed by a measure of robustness given by the number of permitted link changes, which is (ordinally and cardinally) ranked in a probabilistic sense. Application of the proposed framework to adolescents’ tobacco smoking and friendship decisions suggests that: (a.) friendship networks respond to increases of tobacco prices and this response amplifies the intended policy effect on smoking, (b.) racially desegregating high-schools, via stimulating the social interactions of students with different intrinsic propensity to smoke, decreases the overall smoking prevalence, (c.) adolescents are averse to sharing friends so that there is a rivalry for friendships, (d.) when data on individuals’ friendship network is not available, the importance of price centered policy tools is underestimated. JEL Codes: D85, C73, L19