Abstract

In many economic networks, the network is not exogenous but instead agents decide what links they want to build. A central question is predicting the networks that agents will form. This chapter presents myopic and farsighted concepts for modeling network formation when the formation of a link requires the consent of both agents. The chapter illustrates the bites that these solution concepts have on economic applications and investigates whether the networks formed by farsighted agents are efficient and different from those formed by myopic agents. Three models of network formation are analyzed: networks of R and D collaborations, networks of free trade agreements, and criminal networks. It is shown that, depending on the application, myopia and farsightedness may lead to divergent predictions, and farsightedness can help to support the emergence of efficient networks.