| Abstract: |
We study the formation of social networks that are based on local interaction
and simple rule following. Agents evaluate the profitability of link formation
on the basis of the Myerson-Shapley principle that payoffs come from the
marginal contribution they make to coalitions. The NP-hard problem associated
with the Myerson-Shapley value is replaced by a boundedly rational 'spatially'
myopic process. Agents consider payoffs from direct links with their
neighbours (level 1) which can include indirect payoffs from neighbours'
neighbours (level 2) and up to M-levels that are far from global. Agents
dynamically break away from the neighbour to whom they make the least marginal
contribution. Computational experiments show that when this self-interested
process of link formation operates at level 2 neighbourhoods, agents
self-organize into stable and efficient network structures that manifest
reciprocity, equity and segregation reminiscent of hunter gather groups. A
large literature alleges that this is incompatible with self-interested
behaviour and market oriented marginality principle in the allocation of
value. We conclude that it is not this valuation principle that needs to be
altered to obtain segregated social networks as opposed to global components,
but whether it operates at level 1 or level 2 of social neighbourhoods.
Remarkably, all M>2 neighbourhood calculations for payoffs leave the efficient
network structures identical to the case when M=2. |