On perfect pairwise stable networks (Q2682792)

This paper studies perfect pairwise stable networks and shows that there exits a refinement of pairwise stability addressing the limitations of pairwise stability. A network is perfect pairwise stable if no agents have an incentive to modify the weight of any of their links even if the weights of the other links are slightly perturbed. A theoretical foundation for the concept of perfect pairwise stability is presented. When payoff functions are continuous, quasi-concave and weakly monotonic, there always exists at least a weighted perfect pairwise stable network. In a perfect pairwise stable network, no link weights are dominated. A new sequential setting for network formation is introduced, where agents can decide whether to form a link or not in a specified order. It is shown that the perfect pairwise stability and perfect Nash equilibrium may lead to different sets of predictions.