Games on Endogenous Networks

We study network games in which players both create spillovers for one another and choose with whom to associate. The endogenous outcomes include both the strategic actions (e.g., effort levels) and the network in which spillovers occur. We introduce a framework and two solution concepts that extend standard approaches -- Nash equilibrium in actions and pairwise (Nash) stability in links. Our main results show that under suitable monotonicity assumptions on incentives, stable networks take simple forms. Our first condition concerns whether links create positive or negative payoff spillovers. Our second condition concerns whether actions and links are strategic complements or substitutes. Together, these conditions allow for 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.