NATIONAL BUREAU OF ECONOMIC RESEARCH
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An Experimental Study of Decentralized Link Formation with Competition

Margherita Comola, Marcel Fafchamps

NBER Working Paper No. 21758
Issued in November 2015
NBER Program(s):The Development Economics Program

We design a laboratory experiment to investigate bilateral link formation in a setting where payoffs are pair-specific. Our link formation rule is decentralized and players can make link offers and counter-offers, as in a Beckerian marriage market. The game is designed in such a way that a stable equilibrium configuration exists and does not depend on conditions such as initial configuration or order of move. We test whether the theoretical equilibrium is obtained under experimental conditions, and which individual motivations and decision-making techniques lead players to depart from myopic best response. We find that players are remarkably good at attaining a stable equilibrium configuration, which happens in 86% of the games. Results show that complete information speeds up the game via self-censoring, and that sub-optimal choices are mostly driven by over-thinking behavior and reluctance to accept to link with players who have been disloyal earlier in the game.

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Document Object Identifier (DOI): 10.3386/w21758

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