M.J. van der Leij
- Risk aversion and social networks
- Number of pages
- Valencia: Ivie (Instituto Valenciano de Investigaciones Económicas)
- Ivie Working paper
- Volume | Edition (Serie)
- WP-AD 2012-01
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Agents involved in the formation of a social or economic network typically face uncertainty about the benefits of creating a link. However, the interplay of such uncertainty and risk attitudes has been neglected in the network formation literature. We propose a dynamic network formation model that builds on standard microeconomic concepts of utility maximization, incomplete information, and risk aversion. With our model, we discover a new mechanism that generates a correlation between network position and payoffs of individuals. Second, we show how the generated network architecture depends on the uncertainty in the environment it is embedded in.
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