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Communication network formation with link specificity and value transferability

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Working paper
Author/s: 
Marjolein Harmsen-van Hout, Jean-Jacques P. Herings and Benedict G.C. Dellaert
Issue number: 
RM/11/022
Publisher: 
Maastricht University
Year: 
2011
We propose a model on strategic formation of communication networks with (i) link specificity: the more direct links somebody maintains, the less she can specify her attention per link, the lower her links’ value, while this negative externality was previously ignored in the communication context, and (ii) value transferability via indirect links for informational but not for social value from communication, while this positive externality was modeled uniformly before. Assuming only social value to isolate the impact of link specificity, the pairwise stable set includes many non- standard networks under high or particular combinations of fully connected components under low link specificity. Allowing for social and informational value, the joint effect of link specificity and value transferability reduces the stable set to certain fragmented networks under high or the complete network under low link specificity. These extremes are beneficial for efficiency, whereas quite inefficient networks may arise for intermediate link specificity.
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