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Networks of relations and Word-of-Mouth Communication

by Giancarlo Spagnolo (with Steffen Lippert), published in the Games and Economic Behavior

We study networks of relations – groups of agents linked by several cooperative relationships – exploring equilibrium conditions under different network configurations and information structures. Relationships are the links through which soft information can flow, and the value of a network lies in its ability to enforce agreements that could not be sustained without the information and sanctioning power provided by other network members. The model explains why network closure is important; why stable subnetworks may inhibit more valuable larger networks; and why information flows and action choices cannot be analyzed separately. Contagion strategies are suboptimal here, as they inhibit information transmission, delaying punishments.

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