Group identity in a network formation game with cost sharing

Abstract

This paper introduces the choice of group identity, which is comprisedof characteristics and commitments to these characteristics,in a network formation model where links costs are shared. Playerswant to link to the largest group given that linking costs for playersof the same (different) characteristic are decreasing (increasing)in their commitments. The equilibrium concepts used are Nashequilibrium as well as one that looks for stability allowing for bilateralnegotiations. Conditions are shown under which the endogenouschoice of characteristics and commitments allow for multiplegroups with segregated or connected networks. When group identityis partly endogenous, such that characteristics are fixed and playersonly choose commitment, it is shown that the equilibrium populationcommitment profile dictates whether the resulting network issegregated or connected.Whengroup identity is fully endogenous, itis shown that multiple groups and segregated networks are possibleequilibrium outcomes but such outcomes are not stable unless thegroup size additionally affects the costs of link formation.