Stability and Equilibrium Selection in a Link Formation Game

Abstract

In this paper we use a non cooperative equilibrium selection approach as a notion of stability in link formation games. Specifically, we follow the global games approach first introduced by Carlsson and van Damme (1993), to study the robustness of the set of Nash equilibria for a class of link formation games in strategic form with supermodular payoff functions. Interestingly, the equilibrium selected is in conflict with those predicted by the traditional cooperative refinements. Moreover, we get a conflict between stability and efficiency even when no such conflict exists with the cooperative refinements. We discuss some practical issues that these different theoretical approaches raise in reality. The paper also provides an extension of the global game theory that can be applied beyond network literature.Global Games, Equilibrium Selection, Networks.