Antonio Cabrales, Gema Pomares, David Ramos Muñoz & Ángel Sánchez
Journal of Economic Interaction and Coordination
We experimentally study a reduced-form network-formation game inspired by Cabrales et al (2024). A set of network agents chooses (i) a privately profitable number of outside projects and (ii) bilateral links with other network agents. Links generate concave private benefits, whereas a partner’s outside projects impose a cost on each of its network neighbors. Because an agent does not internalize the costs that its own projects impose on its partners, the equilibrium benchmark features more projects and fewer network links than the social optimum. In a repeated laboratory experiment with fixed groups, treatment comparisons are broadly consistent with these comparative-static predictions. Exact choices, however, are systematically pulled toward the interior of the feasible action set, especially when the theoretical benchmark lies at a boundary. We interpret the evidence as support for the model’s core cross-layer externality mechanism, rather than as a direct test of a particular banking or supply-chain institution, and discuss learning, stochastic choice, and coordination as possible sources of the quantitative deviations.
Read the full article at: link.springer.com
