Micro Seminars EUR, Organizations and Markets Seminars

Francesco Squintani (University of Warwick, United Kingdom)
Friday, October 21, 2016

Motivated by political economy applications, we revisit classic analysis in the theory of network economics to introduce the possibility that agents are ideologically differentiated.
Celebrated studies by Jackson and Wolinsky (1996) and Bala and Goyal (2000) identified the star as the optimal network structure, and established its stability properties, in a wide class of contexts. They used as a main motivation the transmission of non-rival information, along a network of costly links, and with exponential signal decay across links. We reconsider information transmission in networks, by introducing ideological differences in the players’ preferences, with the aim to study applications such as, for example, the formation of political networks among elected office holders of different jurisdictions. Under parametric restrictions analogous to the ones exploited by the above studies, and in contrast with their results, we find the optimal network to be the line in which players are ordered according to their ideologies.
Further, we identify conditions under which this ordered line arises endogenously as the stable network through unilateral or bilateral link sponsorship. Our results suggest efficiency and stability rationales for why political networks of ideologically differentiated peers would only display links between like-minded agents. In contrast, hierarchical networks like the star would be more likely in organizations such as commercial companies, or the army, in which agents preferences are more closely aligned.

To read the paper click here.