Stability of networks under horizon-K farsightedness

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P. Jean-Jacques Herings, Ana Mauleon, Vincent Vannetelbosch
Economic Theory
We introduce the concept of a horizon-K farsighted set to study the influence of the degree of farsightedness on network stability. The concept generalizes existing concepts where all players are either fully myopic or fully farsighted. A set of networks GK is a horizon-K farsighted set if three conditions are satisfied. First, external deviations should be horizon-K deterred. Second, from any network outside of GK there is a sequence of farsighted improving paths of length smaller than or equal to K leading to some network in GK . Third, there is no proper subset of GK satisfying the first two conditions. We show that a horizon-K farsighted set always exists and that the horizon-1 farsighted set G1 is always unique. For generic allocation rules, the set G1 always contains a horizon-K farsighted set for any K. We provide easy to verify conditions for a set of networks to be a horizon-K farsighted set, and we consider the efficiency of networks in horizon-K farsighted sets. We discuss the effects of players with different horizons in an example of criminal networks.
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