Lock-in through passive connections (Q1995324)

This paper focuses on lock-in phenomenon in social networks, where payoff is received through passive connections. It is shown that action-heterogeneous network configuration, where different actions are adopted by different agents, are Nash equilibria and can be stochastically stable. The coordination game proposed here captures a conflict between efficiency-consideration and risk-consideration, where one equilibrium is payoff dominant and the other is risk dominant. In the model, the agents decide on an action in a \(2\times2\) coordination game and who choose their active interaction partners through establishing costly links to them, where agents are constrained in the number of links they can create. It is shown that under constrained interactions the payoff received from passive connections can create an endogenous form of lock-in. The absorbing sets of the dynamic process is characterized and a refinement of the set of Nash equilibria is given.