The Role of Trust in Costly Network Formation

Abstract

We investigate game theoretic models of entwork formation that are based on individual actions only. Our approach is grounded in three simple and realistic principles. (1) Link formation should be a binary process of consent. (2) Link formation should be costly. (3) The class of network payoff functions should be as general as possible. We provide charecterizations of stable networks under the hypothesis of mutual consent for the case of two-sided and one-sided link formation costs. Furthermore, we introduce a new eqilibrium concept based on a limited, realistic form of farsightedness or (myopic) ''trust'' in network formation. We provide comparisons of the resulting networks with networks satisfying well known stability concepts developed in the literatureSocial networks, individual stability, pairwsie stability, trust