Review of Economic Design

, Volume 16, Issue 1, pp 71–87 | Cite as

Under-connected and over-connected networks: the role of externalities in strategic network formation

  • Berno BuechelEmail author
  • Tim Hellmann
Original Paper


Since the seminal contribution of Jackson and Wolinsky (J Econ Theory 71(1):44–74, 1996) it has been widely acknowledged that the formation of social networks exhibits a general conflict between individual strategic behavior and collective outcome. What has not been studied systematically are the sources of inefficiency. We approach this omission by analyzing the role of positive and negative externalities of link formation. This yields general results that relate situations of positive externalities with stable networks that cannot be “too dense” in a well-defined sense, while situations with negative externalities tend to induce “too dense” networks. Those results are neither restricted to specific assumptions on the agents’ preferences (e.g. homogeneity), nor to a specific notion of stability or efficiency.


Networks Connections Externalities Spillovers Stability Efficiency 

JEL Classification

D85 C72 L14 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bala V, Goyal S (2000) A noncooperative model of network formation. Econometrica 68(5): 1181–1230CrossRefGoogle Scholar
  2. Belleflamme P, Bloch F (2004) Market sharing agreements and collusive networks. Int Econ Rev 45(2): 387–411CrossRefGoogle Scholar
  3. Bloch F, Dutta B (2009) Communication networks with endogenous link strength. Games Econ Behav 66(1): 39–56CrossRefGoogle Scholar
  4. Bloch F, Jackson M (2006) Definitions of equilibrium in network formation games. Int J Game Theory 34(3): 305–318CrossRefGoogle Scholar
  5. Bloch F, Jackson MO (2007) The formation of networks with transfers among players. J Econ Theory 133(1): 83–110CrossRefGoogle Scholar
  6. Buechel B, Hellmann, T (2009) Under-connected and over-connected networks. Working papers 2009.38, Fondazione Eni Enrico MatteiGoogle Scholar
  7. Buskens V, van de Rijt A (2008) Dynamics of networks if everyone strives for structural holes. Am J Sociol 114: 371–407CrossRefGoogle Scholar
  8. Calvó-Armengol A, Ilkiliç R (2009) Pairwise-stability and nash equilibria in network formation. Int J Game Theory 38(1): 51–79CrossRefGoogle Scholar
  9. Chakrabarti S, Gilles R (2007) Network potentials. Rev Econ Des 11(1): 13–52Google Scholar
  10. Dasgupta P, Stiglitz J (1980) Uncertainty, industrial structure, and the speed of r&d. Bell J Econ 11(1): 1–28CrossRefGoogle Scholar
  11. Dutta B, Mutuswami S (1997) Stable networks. J Econ Theory 76(2): 322–344CrossRefGoogle Scholar
  12. Goyal S, Joshi S (2006a) Bilateralism and free trade. Int Econ Rev 47(3): 749–778CrossRefGoogle Scholar
  13. Goyal S, Joshi S (2006b) Unequal connections. Int J Game Theory 34(3): 319–349CrossRefGoogle Scholar
  14. Goyal S, Vega-Redondo F (2007) Structural holes in social networks. J Econ Theory 137(1): 460–492CrossRefGoogle Scholar
  15. Hellmann T (2009) Convexity and complementarity in network formation: implications for the structure of pairwise stable networks. Working papers 423, Bielefeld University, IMWGoogle Scholar
  16. Hummon NP (2000) Utility and dynamic social networks. Soc Netw 22(3): 221–249CrossRefGoogle Scholar
  17. Jackson MO (2003) The stability and efficiency of economic and social networks. In: Sertel M, Koray S (eds) Advances in economic design. Springer, HeidelbergGoogle Scholar
  18. Jackson MO (2004) A survey of models of network formation: stability and efficiency. In: Demange G, Wooders M (eds) Group formation in economics: networks, clubs and coalitions. Cambridge University Press, Cambridge, UK, pp 11–49Google Scholar
  19. Jackson MO, Wolinsky A (1996) A strategic model of social and economic networks. J Econ Theory 71(1): 44–74CrossRefGoogle Scholar
  20. Myerson RB (1991) Game theory: analysis of conflict. Harvard University Press, Cambridge, MassachusettsGoogle Scholar
  21. Rogers BW (2006) A strategic theory of network status. Technical report, California Institute of TechnologyGoogle Scholar

Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of HamburgHamburgGermany
  2. 2.Institute of Mathematical EconomicsBielefeld UniversityBielefeldGermany

Personalised recommendations