nep-net New Economics Papers
on Network Economics
Issue of 2007‒07‒07
twelve papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Technological capability building through networking strategies within high-tech industries By Duysters, Geert; Vanhaverbeke, Wim; Beerkens, Bonnie
  2. ICT Externalities: Evidence from cross country data By Meijers, Huub
  3. An Overview of Coalition & Network Formation Models for Economic Applications By Marco Marini
  4. The Formation of Financial Networks By Ana Babus
  5. Exploration and Exploitation in Technology-based Alliance Networks By Duysters, Geert; Vanhaverbeke, Wim; Beerkens, Bonnie; Gilsing, Victor
  6. In Search of Stars: Network Formation among Heterogeneous Agents By Aljaž Ule; Jacob K. Goeree; Arno Riedl
  7. Naïve Learning in Social Networks: Convergence, Influence and Wisdom of Crowds By Matthew O. Jackson; Benjamin Golub
  8. A Theory of Strategic Diffusion By Sanjeev Goyal; Andrea Galeotti
  9. Governance, Issuance Restrictions, And Competition In Payment Card Networks By Robert S. Pindyck
  10. Beyond clusters: Fostering innovation through a differentiated and combined network approach By Evert-Jan Visser; Oedzge Atzema
  11. How and when do markets tip? Lessons from the Battle of the Bund By Estelle Cantillon; Pai-Ling Yin
  12. Why are Trade Agreements Regional? By Ben Zissimos

  1. By: Duysters, Geert (UNU-MERIT); Vanhaverbeke, Wim (Technical University Eindhoven); Beerkens, Bonnie (Technical University Eindhoven)
    Abstract: Learning through networks has been considered as an important research topic for several years now. Technological learning is more and more based on a combination of internal and external learning and firms need to develop both technological and social capital for that purpose. This paper analyses the relationship between both types of capital and their impact on the technological performance of companies in high-tech industries. We claim and find empirical evidence for decreasing marginal returns on social capital. Technological capital and social capital mutually reinforce each other's effect on the rate of innovation for companies with small patent and alliance portfolios. However, when the patent portfolio and network of alliances are extensive, companies risk to over-invest since optimal levels of social capital become smaller at higher levels of technological capital and the marginal benefits of investing in technological capital decreases the higher the levels of social capital. Finally, we find empirical evidence that companies that explore novel and pioneering technologies have higher levels of innovation performance in subsequent years than companies that solely invest in incremental innovations.
    Keywords: Strategic Alliances, Networks, Innovation
    JEL: O32 O31
    Date: 2007
  2. By: Meijers, Huub (UNU-MERIT)
    Abstract: This paper reports the findings of an empirical study on the external effects of Information and Communication Technologies (ICT) on economic growth and productivity at an aggregate level. It focuses on possible network effects and spillovers emerging as externalities from investments in ICT. The existence of externalities is well described in theoretical work however empirical evidence is scarce. By using time series at the macro level for a panel of 15 countries I find positive externalities for investments in IT software and in telecommunication equipment, but not for IT hardware. The analysis, which accounts for cyclical effects and also takes external effects from non-ICT factors into account, points at considerable lags between the time of investing in these technologies and the time at which the externalities arise. Taking these externality effects into account, the paper shows that the impact of ICT on productivity is almost twice as high as compared to a model that does not include such effects.
    Keywords: Productivity, Network Effects, Spillovers, Information and Communication Technologies, Total Factor Productivity
    JEL: D24 D85 O11 O47
    Date: 2007
  3. By: Marco Marini (Università di Urbino "Carlo Bo" & CREI, Roma Tre)
    Abstract: This paper presents synthetically some recent developments in the theory of coalition and network formation. For this purpose, some major equilibrium concepts recently introduced to model the formation of coalition structures and networks among players are briefly reviewed and discussed. A few economic applications are also illustrated to give a flavour of the type of predictions such models are able to provide.
    Keywords: Coalitions, Networks, Core, Games with Externalities, Endogenous Coalition Formation, Pairwise stability, Stable Networks, Link Formation
    JEL: C70 C71 D23 D43
    Date: 2007–04
  4. By: Ana Babus (Erasmus University Rotterdam)
    Abstract: Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. Banks form links order to reduce the risk of contagion. The network is formed endogenously and serves as an insurance mechanism. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0.
    Keywords: Financial Stability, Network Formation, Contagion Risk
    JEL: C70 G21
    Date: 2007–06
  5. By: Duysters, Geert (UNU-MERIT); Vanhaverbeke, Wim (ECIS, Technical University Eindhoven); Beerkens, Bonnie (ECIS, Technical University Eindhoven); Gilsing, Victor (ECIS, Technical University Eindhoven)
    Abstract: Although the literature converges regarding the reasons why and how networks of technology alliances are formed, there is still lack of agreement on what constitutes an optimal network structure, once it has been formed. The aim of this paper is to fill this void and to determine what constitutes an optimal network structure for exploration and exploitation within the context of technological innovation. We differentiate among a firm's direct ties, indirect ties and degree of redundancy and analyze their role in the pharmaceutical, chemical and automotive industry. Regarding the role of direct ties, in combination with indirect ties, we find two alternative alliance network structures that are effective for both exploitation and exploration. We also find that redundancy in a firm's alliance network has a positive effect on exploitation. This is not the case for exploration, however, which seems to reveal a new insight into the role of redundancy when firms explore new technological fields. A final point is that our findings remain largely invariant across the three industries, enhancing the generalisability of our results.
    Keywords: Networks, Strategic Alliances, Innovation, Learning
    JEL: O32 O31 D85
    Date: 2007
  6. By: Aljaž Ule (University of Amsterdam); Jacob K. Goeree (California Institute of Technology); Arno Riedl (University of Maastricht)
    Abstract: This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the 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. Furthermore, agents’ types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a “star” structure. 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 born but rather develop: with a high-value agent, the network’s centrality, stability, and efficiency all increase over time. Probit estimations based on best-response behaviour and other-regarding preferences are used to analyze individual linking behavior. Our results suggest that heterogeneity is a major determinant for the predominance of star-like structures in real-life social networks.
    Keywords: Network Formation, Experiment, Heterogeneity, Private Information
    JEL: C72 C92 D82 D85
    Date: 2007–06
  7. By: Matthew O. Jackson (Stanford University); Benjamin Golub (Division of the Humanities and Social Sciences)
    Abstract: We study learning and influence in a setting where agents communicate according to an arbitrary social network and naïvely update their beliefs by repeatedly taking weighted averages of their neighbors’ opinions. A focus is on conditions under which beliefs of all agents in large societies converge to the truth, despite their naïve updating. We show that this happens if and only if the influence of the most influential agent in the society is vanishing as the society grows. Using simple examples, we identify two main obstructions which can prevent this. By ruling out these obstructions, we provide general structural conditions on the social network that are sufficient for convergence to truth. In addition, we show how social influence changes when some agents redistribute their trust, and we provide a complete characterization of the social networks for which there is a convergence of beliefs. Finally, we survey some recent structural results on the speed of convergence and relate these to issues of segregation, polarization and propaganda.
    Keywords: Social Networks, Learning, Diffusion, Bounded Rationality
    JEL: D85 D83 A14 L14 Z13
    Date: 2007–06
  8. By: Sanjeev Goyal (University of Cambridge); Andrea Galeotti (University of Essex)
    Abstract: The important role of friends, neighbors and colleagues in shaping individual choices has been brought out in a number of studies over the years. The presence of significant ‘local’ influence in shaping individual behavior suggests that firms, governments and developmental agencies should explicitly incorporate it in the design of their marketing and developmental strategies. This paper develops a framework for the study of optimal strategies in the presence of social interaction. We focus on the case of a single player who exerts costly effort to get a set of individuals – engaged in social interaction – to choose a certain action. Our formulation allows for different types of social interaction (ranging from sharing of information to direct adoption externalities) and also allows for the player to have incomplete information concerning the connections among individuals. The analysis starts by showing that incorporating information on social interaction can have large effects on the profits of a player. We then show that an increase in the level and dispersion of social interaction can raise or lower the optimal strategy and profits of the player, depending on the content of the interaction. We then study the value of social network information for the player and find that it depends on the dispersion in social connections. The economic interest of these results is illustrated via a discussion of two economic applications: advertising in the presence of word of mouth communication and seeding a network.
    Keywords: Social Interaction, Seeding the Network, Word of Mouth Communication, Diffusion Strategy
    JEL: D8 L15
    Date: 2007–06
  9. By: Robert S. Pindyck
    Abstract: I discuss the antitrust suit brought by the U.S. Department of Justice against Visa and MasterCard in 1998. Banks that issue Visa cards are free to also issue MasterCard cards, and vice versa, and many banks issue the cards of both networks. However, both Visa and MasterCard had rules prohibiting member banks from also issuing the cards of other networks, in particular American Express and Discover. In addition, most banks are members of both the Visa and MasterCard networks, so governance is to some extent shared. The DOJ claimed that restrictions on issuance and shared governance were anticompetitive and should be prohibited. Visa and MasterCard argued that these practices were procompetitive. The case raised important questions: Given that many banks issue both Visa and MasterCard, and that most merchants that accept one also accept the other, do the two networks really compete, and if so, how? And do Visa and/or MasterCard have market power, if so, in what market, and how is it exercised?
    JEL: G20 L40 L44
    Date: 2007–07
  10. By: Evert-Jan Visser; Oedzge Atzema
    Abstract: Over the past decades, economic and innovation policy across Europe moved in the direction of creating regional clusters of related firms and institutions. Creating clusters through public policy is risky, complex and costly, however. Moreover, it is not necessary to rely on clusters to stimulate innovation. A differentiated and combined network approach to enhancing innovation and stimulating economic growth may be more efficient and effective, especially though not exclusively in regions lacking clusters. The challenge of such a policy is to mitigate the bottlenecks associated with ‘global pipeline’, ‘local buzz’ and ‘stand alone’ strategies used by innovative firms (cf. Bathelt et al. 2004; Atzema & Visser 2005b), and to combine these strategies with a view to their complementarity in terms of knowledge effects. Private and semi-public brokers will be key in the evolving policy, as timely organizational change is crucial for continued innovation, while brokers also need to mitigate governance problems. This requires region-specific knowledge in terms of sectors, life cycles, institutional and socio-cultural factors, and yields spatially differentiated and differentiating adjustment strategies. The role of public policy is to assist in recruiting, provide start-up funding and monitor brokers. With this, policy moves towards a decentralized, process-based, region-specific, spatially diverging and multi-level system of innovation that is geared towards the evolving innovation strategies of firms.
    Keywords: innovation policy, clusters, networks, governance, regionalization
    JEL: R11 R58 O12 O31 O38
    Date: 2007–06
  11. By: Estelle Cantillon (FNRS, ECARES and CEPR, Université Libre de Bruxelles, CP 114, 50, Avenue F.D. Roosevelt, 1050 Brussels, Belgium.); Pai-Ling Yin (Harvard Business School, Soldiers Field Boston, Massachusetts 02163, USA.)
    Abstract: In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, a London-based derivatives exchange, to DTB, a Frankfurt-based exchange. This paper studies the determinants of the observed dynamics, using a novel panel dataset that contains individual trading firms'membership status at each exchange together with other firms characteristics, and pricing, marketing and product portfolio strategies by each exchange. Our data allows us to distinguish between different explanations for the observed phenomenon. Our results indicate that the main driver was a "market coverage" effect: thanks to the combination its electronic market structure and EU-wide access deregulation, DTB increased the relevant size of the market for exchange members and disproportionately attracted those firms who originally did not exist or used to submit their orders through a broker. Differential liquidity and product portfolio strategies by the exchanges played a secondary role. JEL Classification: G21, G28, L13, L43.
    Keywords: Exchange competition, tipping, electronic trading, open outcry, network effect, Bund, adoption cost.
    Date: 2007–06
  12. By: Ben Zissimos (Vanderbilt University)
    Abstract: This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries, a familiar problem of coordination failure arises giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, and through strategic interaction in tariff setting, regional trade agreements generate larger rent-shifting effects than non regional agreements, which countries use to coordinate on a unique equilibrium. Under naive best responses, regional agreements give way to free trade.
    Keywords: Coalition, Coordination, Trade Liberalization, Trade Agreement, Regionalism
    JEL: F02 F13 F15 C73
    Date: 2007–06

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