Games on Endogenous Networks

We study network games in which players choose both an action level (e.g., effort) that creates spillovers for others and the partners with whom they associate. We introduce a framework and two solution concepts that extend standard solutions for each choice made separately: Nash equilibrium in actions and pairwise stability in links. Our main results show that, under suitable monotonicity conditions on incentives, stable networks take simple forms. The first condition concerns whether links create positive or negative payoff spillovers. The second condition concerns whether actions and links are strategic complements or substitutes. Together, these conditions allow a taxonomy of how network structure depends on economic primitives. We apply our model to understand the consequences of competition for status, to microfound matching models that assume clique formation, and to interpret empirical findings that highlight unintended consequences of group design.