published in: Review of Network Economics: 2012, 11 (3), Article 2
We present an economic experiment on network formation, in which subjects can decide to
form links to one another. Direct links are costly but being connected is valuable. The gametheoretic
basis for our experiment is the model of Bala and Goyal (2000). They distinguish
between two scenarios regarding the flow of benefits through a network, the so-called 1-way
and 2-way flow model. Our main results show that the prediction based on Nash and strict
Nash equilibrium works well in the 1-way flow model but fails largely in the 2-way flow model.
We observe a strong learning dynamic in the 1-way flow model but less so in the 2-way flow
model. Finally, costs of a direct link have a positive impact on the occurrence of (strict) Nash
networks in the 1-way flow model but a negative impact in the 2-way flow model. In our
discussion on possible explanations for these results we focus on strategic asymmetry and
asymmetry with respect to payoffs. We find that the latter asymmetry, i.e., payoff inequity,
plays an important role in the network formation process.
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