A BARGAINING APPROACH TO COORDINATION IN NETWORKS

Abstract

This paper presents a model in which players interact via the formation of costly links and the benefits of bilateral interactions are determined by a coordination game. A novel contribution of this paper is that the fraction of the cost borne by each player involved in a bilateral link is not fixed exogenously, but results from bargaining. We analyze the model both in a static and a dynamic setting. Whereas the static game has multiplicity of equilibria, we show that only one is stochastically stable.Coordination; Nash bargaining solution; Risk-dominance; Stochastic stability