American Economic Review: Vol. 104 No. 3 (March 2014)


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Strategic Interaction and Networks

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Bramoullé, Yann, Rachel Kranton, and Martin D'Amours. 2014. "Strategic Interaction and Networks." American Economic Review, 104(3): 898-930.

DOI: 10.1257/aer.104.3.898


Geography and social links shape economic interactions. In industries, schools, and markets, the entire network determines outcomes. This paper analyzes a large class of games and obtains a striking result. Equilibria depend on a single network measure: the lowest eigenvalue. This paper is the first to uncover the importance of the lowest eigenvalue to economic and social outcomes. It captures how much the network amplifies agents' actions. The paper combines new tools—potential games, optimization, and spectral graph theory—to solve for all Nash and stable equilibria and applies the results to R&D, crime, and the econometrics of peer effects.

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Bramoullé, Yann (Aix-Marseille U and Laval U)
Kranton, Rachel (Duke U)
D'Amours, Martin (Laval U)

JEL Classifications

C72: Noncooperative Games
D83: Search; Learning; Information and Knowledge; Communication; Belief
D85: Network Formation and Analysis: Theory
H41: Public Goods
K42: Illegal Behavior and the Enforcement of Law
O33: Technological Change: Choices and Consequences; Diffusion Processes
Z13: Economic Sociology; Economic Anthropology; Social and Economic Stratification

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