Strategic information dissemination in endogenous networks

The self-interest of agents in strategic networks, i.e. networks where self-interested agents interact, leads to intrinsic incentive problems which impact the stability and efficiency of such networks. This paper propose the first game-theoretic framework for analyzing and understanding how strategic networks are formed endogenously, driven by the self-interested decisions of individual agents aiming to maximize their own utilities by trading-off the costs of forming links with other agents and the benefits of disseminating information to other agents. The proposed framework departs from the traditional research on strategic link formation in economics which postulates that agents only benefit by forming links to acquire the information produced by other agents. Given the agents´ interests in information dissemination, our analysis is able to predict several important properties of the strategic networks (arising from the agents´ strategic link formation) at equilibria. We rigorously prove that, in equilibrium, strategic networks frequently exhibit a core-periphery structure that is commonly observed on the Internet. In such core-periphery networks there are only few agents at the center (core) of the network while the majority of agents are at the periphery of the network and communicate with other agents via links maintained by the “core” agents, who play the role of “connectors” in the network. Also, the proposed framework can be used to determine under what conditions the strategic networks operating in equilibrium are minimally connected (i.e. there is a unique path between any two agents) and have short network diameters. These properties are important because they ensure the efficiency and robustness of the resulting equilibrium networks.