Endogenous Network Dynamics

Abstract

Modeling club structures as bipartite directed networks, we formulate the problem of club formation as a noncooperative game of network formation and identify conditions on network formation rules and players' network payoffs sufficient to guarantee that the game has a potential function. Our sufficient conditions on network formation rules require that each player be choose freely and unilaterally those clubs he joins and also his activities within these clubs (subject to his set of feasible actions). We refer to our conditions on rules as noncooperative free mobility. We also require that players' payoffs be additively separable in player-specific payoffs and externalities (additive separability) and that payoff externalities - a function of club membership, club activities, and crowding - be identical across players (externality homogeneity). We then show that under these conditions, the noncooperative game of club network formation is a potential game over directed club networks and we discuss the implications of this result.