nep-net New Economics Papers
on Network Economics
Issue of 2005‒10‒22
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities By Etienne B. Yehoue
  2. Science, social networks and spillovers By O. Sorenson; J. Singh; L. Fleming
  3. In Search of Stars: Network Formation among Heterogeneous Agents By Jacob K. Goeree; Arno Riedl; Aljaz Ule
  4. Why Are Similar Workers Paid Differently? The Role of Social Networks By François Fontaine
  5. A Strategic Analysis of Competition Between Open Source and Proprietary Software By Ravi Sen
  6. Organizational Loyalties and Models of Firms: Governance Design and Standard of Duties By Fabrizio Cafaggi
  7. Monetary Policy, Monetary Areas, and Financial Development with Electronic Money By Marco Arnone; Luca Bandiera
  8. Historical Financing of Small- and Medium-Sized Enterprises By Robert Cull; Lance E. Davis; Naomi R. Lamoreaux; Jean-Laurent Rosenthal

  1. By: Etienne B. Yehoue
    Abstract: The recent experience of the European Economic and Monetary Union (EMU) has stimulated the debate over currency union and reinforced the incentive for the emergence of currency blocs in other regions of the world. This paper builds a dynamic stochastic model-based on network externalities operating through trade channels-to explain the emergence of currency blocs, and specifically, why some countries join a currency union earlier than others. The paper develops and formalizes the intuition that currency bloc formation is path dependent, and that countries join currency blocs sooner the more they trade with the bloc member countries, with each additional member serving in a dynamic way to attract more members into the bloc. Evidence from the current pattern of EMU expansion supports the model, which is later used to elaborate on the pattern of further expansion of the union.
    Keywords: Monetary unions , European Economic and Monetary Union , Trade relations , Economic models ,
    Date: 2004–12–08
  2. By: O. Sorenson; J. Singh; L. Fleming
    Abstract: Previous empirical research has established that science appears to stimulate the widespread diffusion of knowledge. The exact mechanism through which science catalyzes knowledge flow, however, remains somewhat ambiguous. This paper investigates whether the observed knowledge diffusion associated with science-based innovation genuinely stems from the norm of openness and incentives for publication, or whether it arises as an artifact of scientists having more dispersed social networks that facilitate the dissemination of tacit knowledge. Our findings support the former possibility: We use patent citation patterns to track knowledge flows, and find that science-based innovations diffuse more widely even after controlling for the underlying social networks of researchers as measured using data on prior collaborations.
    Date: 2005–10
  3. By: Jacob K. Goeree (California Institute of Technology); Arno Riedl (University of Maastricht and IZA Bonn); Aljaz Ule (CREED, University of Amsterdam)
    Abstract: This paper reports the results of a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the basic Bala-Goyal (2000) model of network formation with decay and two-way flow of benefits by allowing for agents with lower linking costs or higher benefits to others. We consider treatments where agents' types are common knowledge and treatments where agents' types are private information. In all treatments, the (efficient) equilibrium network has a "star" structure. We find that with homogeneous agents, equilibrium predictions fail completely. In contrast, with heterogeneous agents stars frequently occur, often with the high-value or low-cost agent in the center. Stars are not borne but rather develop: in treatments with a high-value agent, the network's centrality, stability, and efficiency all increase over time. Our results suggest that agents' heterogeneity is a major determinant for the predominance of star-like structures in real-life social networks.
    Keywords: network formation, stars, heterogeneity, laboratory experiments
    JEL: C72 C91 C92 D85
    Date: 2005–09
  4. By: François Fontaine (GREMARS, Université Lille 3 and IZA Bonn)
    Abstract: We provide a matching model where identical workers are embedded in ex-ante identical social networks. Job arrival rate is endogenous and wages are bargained. We study the evolution of networks over time and characterize the equilibrium distribution of unemployment rates across networks. We emphasize that wage dispersion arises endogenously as the consequence of the dynamics of networks, firms’ strategies and wage bargaining. Moreover, contrary to a generally accepted idea, social networks do not necessary induce stickiness in unemployment dynamics. Our endogenous matching technology shows that the effects of networks on the dynamics mostly hinge on search externalities. Our endogenous framework allows us to quantify these effects.
    Keywords: social networks, matching, wage dispersion
    JEL: E24 J64 J68
    Date: 2005–09
  5. By: Ravi Sen (Texas A&M University)
    Abstract: This paper takes an analytical approach to identify the conditions under which freely available open source software (OSS) and/or the commercial version of the same (OSS-SS) will adversely affect the market position of proprietary software (PS), and suggests some strategic steps that the PS vendor can take in order to compete successfully. For example, we find that in software markets characterized by low network benefits and OSS-SS with low usability (relative to PS), open source software will have the dominant market share. Interestingly, in these markets the profitability of PS vendor, when the OSS-SS is also present in the market, is higher than its profitability, when the OSS-SS is absent from the software market. In software markets characterized by low network benefits and OSS-SS with high usability, PS will dominate the market in terms of market share. It can maintain its domination by actively participating in OSS projects and ensuring that OSS is as usable as OSS- SS. In software markets characterized by high network benefits and OSS- SS with low usability (relative to PS), we should expect to see the open source software dominating this market in future. However, PS vendors can effectively compete by ensuring that PS is more usable than OSS-SS and OSS. Finally, in software markets characterized by high network benefits and OSS-SS with high usability, PS faces the maximum threat since open source software will dominate the market in terms of market share. Furthermore, the equilibrium price that the PS can charge will not result in positive profits, thus ensuring the exit of PS vendors from the software markets. However, we have yet to see a commercial version of open source in this software category that is as usable as the PS. Therefore, we have not observed the exit of PS vendors from this software segment.
    Keywords: Open source software, software market, software competition, economics of open source, commercial open source, FLOSS.
    JEL: L
    Date: 2005–10–17
  6. By: Fabrizio Cafaggi
    Abstract: This paper makes the two following claims: 1) The legal dimension of loyalty within organizations goes beyond duties. The governance design aimed at ensuring loyalty may strongly affect standards that characterize each layer of the organization. The interaction between standards of duty and the governance dimension of loyalty should, therefore, be more tailored to specific legal forms and their functional correlation with ownership and financing. 2) There is a greater divergence than has so far been acknowledged between the function of loyalty in vertically integrated firms and in networks of small firms. This difference, created by the relationship between the duty and the governance dimensions, should have repercussions on the definitions of legal standards. In particular, it should reflect the different relationships between hierarchy, monitoring, and loyalty and the choice between prohibitory, authorization-based, and compensatory rules. The analysis concentrates on the key variables that may affect the choice between vertical and horizontal monitoring to ensure compliance with loyal behavior in two polar models: hierarchical firms and networks of small firms. It reveals the importance of considering the governance design when defining duties of loyalty and related standards to evaluate party-related transactions in both cases but, at the same time, the necessity of using different interpretive categories
    Date: 2005–05–01
  7. By: Marco Arnone; Luca Bandiera
    Abstract: Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.
    Keywords: Money , Monetary policy , Monetary unions , Monetary operations ,
    Date: 2004–07–28
  8. By: Robert Cull; Lance E. Davis; Naomi R. Lamoreaux; Jean-Laurent Rosenthal
    Abstract: We focus on the economies of the North Atlantic Core during the nineteenth and early twentieth centuries and find that an impressive variety of local financial institutions emerged to supply the needs of SMEs wherever there was sufficient demand for their services. Although these intermediaries had significant weaknesses, they were able to tap into local information networks and so extend credit to firms that were too young or small to secure funds from large regional or national institutions. In addition, by raising the return to savings for local households, they helped to mobilize significant new resources for economic development.
    JEL: G2 N2
    Date: 2005–10

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