Local Strategy Interaction With Heterogeneous Connection Cost In Endogenous Network Environment

This paper mainly deals with the local strategic interaction in the context of endogenous network formation, where players can only play coordination game with their direct neighbors. In the network formation process, the cost of link formation is heterogeneous(with two levels).Two new models are proposed in the dissertation. In the first model, the cost of link formation is based on the partner’s action choice. Players would bear high-level costs when establishing links with players who choose an efficient action, and would bear low-level costs when establishing links with players who choose a risk-dominated action.In the second model, the cost of link formation is based on the player’s own action choice.Players would bear one cost when he choose efficient action, and would bear another cost when he choose risk-dominated action.In each case of heterogeneous link formation costs, the nature of network structure and players’ choices are given explicitly in the equilibrium outcomes, and how the cost of link formation affecting the equilibrium outcomes is studied analytically. When link cost is low, the equilibrium network structure is complete and essential. When link cost is high,the equilibrium network structure is empty. Players’ action choice depends on the relationship between link costs and payoff parameters.