Publications
Communication, networks and asset price dynamics: A survey Journal of Economic Interaction and Coordination, forthcoming
Abstract: In this paper we provide a wide-ranging survey of the state of the art in the area of communication and asset price dynamics. We start out by documenting empirical evidence that social communication influences investment decisions and asset prices, before turning to the main modelling approaches in the literature (both past and present). We discuss models of belief-updating based on observed performance; models of herd behaviour; and models with social interactions that arise from preferences for conformity or contrarianism. Our main contribution is to introduce readers to a \emph{social network} approach which has been widely used in the opinion dynamics literature, but only recently applied to asset pricing. In the final part we show how recent contributions to both modelling and empirical work are using the social network approach to improve our understanding of financial markets and asset price dynamics. We conclude with some thoughts on fruitful avenues for future research.
Pairwise Stable Networks in Homogenous Societes with Weak Link Externaitites European Journal of Operational Research, doi: 10.1016/j.ejor.2020.09.025
Abstract: We study general properties of pairwise stable and pairwise Nash stable networks when players are ex-ante homogeneous. Rather than assuming a particular functional form of utility, we impose general link externality conditions on utility such as ordinal convexity and ordinal strategic complements. Depending on these rather weak notions of link externalities, we show that pairwise Nash stable networks of various structure exist. For stronger versions of the convexity and strategic complements conditions, we are even able to characterize all pairwise stable networks: they are nested split graphs. We illustrate these results with many examples from the literature, including utility functions that arise from games with strategic complements played on the network and utility functions that depend on centrality measures such as Bonacich centrality.
R&D Investments under Endogenous Cluster Formation (with Herbert Dawid) Journal of Economic Behavior and Organization Volume 174, pp 253–283, doi: 10.1016/j.jebo.2020.03.039
Abstract: We study investments in R&D and the formation of R&D clusters of firms which are competitors in the market. In a three stage game, firms first decide on long-term R&D investment, then form research clusters according to the unanim- ity game introduced in Bloch(1995), and finally compete in quantities. For some range of investment costs, equilibria with no-investment co-exist with equilibria where a large fraction of firms invest in R&D. Because of the effects of R&D investment on cluster membership, firms tend to over-invest compared to a sce- nario where research clusters are ex-ante fixed and also compared to the welfare optimum.
The Transmission of Continuous Cultural Traits in Endogenous Social Networks (with Fabrizio Panebianco, Economics Letters, Volume 167, pp 51-55, doi: 10.1016/j.econlet.2018.02.019)
Abstract: We study a model of transmission of continuous cultural traits across generations where children learn their cultural trait from their parents and their social environment modeled by a network. Parents can engage in the socialization process of their children by biasing links in the network in order for their children to adopt a cultural trait similar to their own. In this endogenous network, we study the emergence of positive and negative role models, the existence of a steady state cultural trait, its characterization in terms long-run influence of each dynasty, and the speed of convergence.
Strategic Formation of Homogeneous Bargaining Networks (with Florian Gauer, Games and Economic Behavior, Volume 106, pp 51-74, doi: 10.1016/j.geb.2017.09.011)
Abstract: We study a model of strategic network formation prior to a Manea (2011) bargaining game: ex-ante homogeneous players form costly undirected links, anticipating expected equilibrium payoffs from the subsequent bargaining game. Assuming patient players, we provide a complete characterization of generically pairwise stable networks: specific unions of separated pairs, odd circles, and isolated players constitute this class. We also show that many other structures, such as larger trees or unbalanced bipartite networks, cannot be pairwise stable at all. The analysis implies that the diversity of possible bargaining outcomes is small in (generically) pairwise stable networks.
International Environmental Agreements for Local and Global Pollution (with Michael Günther, Journal of Environmental Economics and Management, Volume 81, pp 38–58, doi: 10.1016/j.jeem.2016.09.001)
Abstract: Increasing concerns about climate change have given rise to the formation of International Environmental Agreements (IEAs) as a possible solution to limit global pollution effects. In this paper, we study the stability of IEAs in a repeated game framework where we restrict to strategies which are simple and invariant to renegotiation. Our main contribution is that we characterize necessary and sufficient conditions for stability of an IEA when pollution has both a global and local effect. Local pollution spillovers are represented by a network structure. We find that stable IEAs exist if the network structure is balanced. Too large asymmetries in the degree of local spillovers may, however, lead to non-existence of stable structures. We also discuss the implications of our results for welfare. The generality of our approach allows for several applications, in particular the provision of public goods.
Opinion Dynamics and Wisdom under Conformity (with Berno Büchel and Stefan Klößner, Journal of Economic Dynamics and Control 2015, Volume 52, pp 240–257, doi:10.1016/j.jedc.2014.12.006)
Abstract: We study a dynamic model of opinion formation in social networks. In our model, boundedly rational agents update opinions by averaging over their neighbors' expressed opinions, but may misrepresent their own opinion by conforming or counter-conforming with their neighbors. We show that an agent's social influence on the long-run group opinion is increasing in network centrality and decreasing in conformity. Concerning efficiency of information aggregation or ``wisdom'' of the society, it turns out that misrepresentation of opinions need not undermine wisdom, but may even enhance it. Given the network, we provide the optimal distribution of conformity levels in the society and show which agents should be more conforming in order to increase wisdom.
The Dynamics of Continuous Cultural Traits in Social Networks (with Berno Büchel and Michael Pichler, Journal of Economic Theory 2014, Volume 154, pp 274–309, doi: 10.1016/j.jet.2014.09.008)
Abstract: We consider an overlapping generations model where continuous cultural traits are transmitted from an adult generation to the children. A weighted social Network describes how children are influenced not only by their parents but also by other role models within the society. Parents can invest into the purposeful socialization of their children by strategically displaying a cultural trait (which need not coincide with their true cultural trait). We observe a cultural substitution effect when parents choose their behavior optimally. Based on Nash equilibrium behavior, we then study the dynamics of cultural traits throughout generations. These converge if parent’s influence on their children is large enough compared to the social environment’s influence. Under convergent dynamics, closed subgroups fully assimilate, while heterogeneous traits prevail in the other groups. Speed of convergence is low when parents’ incentives to socialize their children to the own trait are high.
The Evolution of R&D Networks (with Herbert Dawid, Journal of Economic Behavior and Organisation 2014, Volume 105, pp 158–172, doi: 10.1016/j.jebo.2014.03.004)
Abstract: We study the evolution of R&D networks in a Cournot model where firms may lowermarginal costs due to bilateral R&D collaborations. Stochastically stable R&D networksexhibit the dominant group architecture, and, contrary to the existing literature, generi-cally unique predictions about the size of the dominant group can be obtained. This sizedecreases monotonically with respect to the cost of link formation and there exists a lowerbound on the size of the dominant group for non-empty networks. Stochastically stablenetworks are always inefficient and an increase in linking costs has a non-monotone effecton average industry profits
Evolution of Social Networks (with Mathias Staudigl, European Journal of Operational Research 2014, Volume 234, Issue 3, pp 583-596, doi: 10.1016/j.ejor.2013.08.022)
Abstract: Modeling the evolution of networks is central to our understanding of large communication systems, and more general, modern economic and social systems. The research on social and economic networks is truly interdisciplinary and the number of proposed models is huge. In this survey we discuss a small selection of modeling approaches, covering classical random graph models, and game-theoretic models to analyze the evolution of social networks. Based on these two basic modeling paradigms, we introduce co-evolutionary models of networks and play as a potential synthesis.
On the Existence and Uniqueness of Pairwise Stable Networks (International Journal of Game Theory 2013, Volume 42, Issue 1, pp 211-237, doi: 10.1007/s00182-012-0335-9)
Abstract: In this paper we show how externalities between links affect the existence and uniqueness of pairwise stable (PS) networks. For this we introduce the properties ordinal convexity (concavity) and ordinal strategic complements (substitutes) of utility functions on networks. It is shown that there exists at least one PS network if the profile of utility functions is ordinal convex and satisfies the ordinal strategic complements property. On the other hand, ordinal concavity and ordinal strategic substitutes are sufficient for some uniqueness properties of PS networks. Additionally, we elaborate on the relation of the link externality properties to definitions in the literature.
Under-connected and over-connected networks: the role of externalities in strategic network formation (with Berno Büchel, Review of Economic Design 2012, Volume 16, Issue 1, pp 71-87, doi: 10.1007/s10058-012-0114-x)
Abstract: Since the seminal contribution of Jackson and Wolinsky (J Econ Theory 71(1):44–74, 1996) it has been widely acknowledged that the formation of social networks exhibits a general conflict between individual strategic behavior and collective outcome. What has not been studied systematically are the sources of inefficiency. We approach this omission by analyzing the role of positive and negative externalities of link formation. This yields general results that relate situations of positive externalities with stable networks that cannot be “too dense” in a well-defined sense, while situations with negative externalities tend to induce “too dense” networks. Those results are neither restricted to specific assumptions on the agents’ preferences (e.g. homogeneity), nor to a specific notion of stability or efficiency.
Stable Networks in Static and Dynamic Models of Network Formation. (Dissertation. Institute of Mathematical Economics, Bielefeld University, 2009)