Abstract:
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We study the problem of designing efficient network sequentially. In each period, the planner connects two unlinked agents in the network formed in previous periods, then the agents play a game with local complementarity under the newly formed network. The planner benefits from the entire discounted stream of equilibrium welfare. We show that, forming a nested split graph in each period is an optimal strategy for the planner for any values of discount factors. Moreover, when the planner heavily discounts future welfare, the optimal strategy induces a quasi-complete graph in each period regardless of the strength of complementary effect. Our paper therefore provides a micro-foundation for quasi-complete network since it is formed under greedy algorithm. We also discuss the robustness of these results under non-linear best response and heterogeneous agents.
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