Social and Economic Network Formation: A Dynamic Model

We study the dynamics of a game-theoretic network formation model that yields large-scale small-world networks. So far, mostly stochastic frameworks have been utilized to explain the emergence of these networks. On the other hand, it is natural to seek for game-theoretic network formation models in which links are formed due to strategic behaviors of individuals, rather than based on probabilities. Inspired by Even-Dar and Kearns' model [8], we consider a more realistic framework in which the cost of establishing each link is dynamically determined during the course of the game. Moreover, players are allowed to put transfer payments on the formation and maintenance of links. Also, they must pay a maintenance cost to sustain their direct links during the game. We show that there is a small diameter of at most 4 in the general set of equilibrium networks in our model. We achieved an economic mechanism and its dynamic process for individuals which firstly; unlike the earlier model, the outcomes of players' interactions or the equilibrium networks are guaranteed to exist. Furthermore, these networks coincide with the outcome of pairwise Nash equilibrium in network formation. Secondly; it generates large-scale networks that have a rational and strategic micro-foundation and demonstrate the main characterization of small degree of separation in real-life social networks. Furthermore, we provide a network formation simulation that generates small-world networks.