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  • Cited by 69
  • Print publication year: 2005
  • Online publication date: February 2010

1 - A Survey of Network Formation Models: Stability and Efficiency

Summary

Introduction

The set of economic situations in which network structures play an important role is wide and varied. For instance, personal contacts play critical roles in obtaining information about job opportunities. Such networks of relationships also underlie the trade and exchange of goods in noncentralized markets, the provision of mutual insurance in developing countries, research and development and collusive alliances among corporations, and international alliances and trading agreements to mention just a few examples.

Given both the prevalence of situations in which networks of relationships play a role and their importance in determining the outcome of the interaction, it is essential to have theories about how such network structures matter and how they form. To get a feeling for what kinds of issues arise and why we might be interested, consider a brief example. We know from extensive research in both the sociology and labor economics literature that social connections are the leading source of information about jobs and that ultimately many (and in some professions most) jobs are obtained through personal contacts. The reason we might care about this is that the structure of the social network then turns out to be a key determinant of

(i) who gets which jobs, which has implications for social mobility;

(ii) how patterns of unemployment relate to ethnicity, education, geography, and other variables, and, for instance, why there might be persistent differences in employment between races;

(iii) whether or not jobs are being efficiently filled; and

(iv) the incentives that individuals have to educate themselves and to participate in the workforce.