Farsighted network formation

This paper studies a model of dynamic network formation when individuals are farsighted: players evaluate the desirability of a "current" move in terms of its consequences on the entire discounted stream of payoffs. We define a concept of equilibrium which takes into account farsighted behavior of agents and allows for limited cooperation amongst agents. We show that an equilibrium process of network formation exists. We also show that there are valuation structures in which no equilibrium strategy profile can sustain efficient networks. We then provide sufficient conditions under which the equilibrium process will yield efficient outcomes. (c) 2004 Elsevier Inc. All rights reserved.