Econometrica: May, 2021, Volume 89, Issue 3

Nash Equilibria on (Un)Stable Networks

https://doi.org/10.3982/ECTA12576
p. 1179-1206

Anton Badev

In response to a change, individuals may choose to follow the responses of their friends or, alternatively, to change their friends. To model these decisions, consider a game where players choose their behaviors and friendships. In equilibrium, players internalize the need for consensus in forming friendships and choose their optimal strategies on subsets of k players—a form of bounded rationality. The k‐player consensual dynamic delivers a probabilistic ranking of a game's equilibria, and via a varying k, facilitates estimation of such games.

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