Original papers

Review of Economic Design

, Volume 5, Issue 3, pp 251-272

First online:

The stability and efficiency of directed communication networks

  • Bhaskar DuttaAffiliated withIndian Statistical Institute, 7 SJS Sansanwal Marg, New Delhi 110016, India (e-mail: dutta@isid.ac.in)
  • , Matthew O. JacksonAffiliated withDevision of Humanities and Social Sciences, Caltech, Pasadena, CA 91125, USA (e-mail: jacksonm@hss.caltech.edu)

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Abstract. This paper analyzes the formation of directed networks where self-interested individuals choose with whom they communicate. The focus of the paper is on whether the incentives of individuals to add or sever links will lead them to form networks that are efficient from a societal viewpoint. It is shown that for some contexts, to reconcile efficiency with individual incentives, benefits must either be redistributed in ways depending on “outsiders” who do not contribute to the productive value of the network, or in ways that violate equity (i.e., anonymity). It is also shown that there are interesting contexts for which it is possible to ensure that efficient networks are individually stable via (re)distributions that are balanced across components of the network, anonymous, and independent of the connections of non-contributing outsiders.

JEL classification: A14, D20, J00
Key words: Networks, stability, efficiency, incentives