Working Paper Revision

Making Friends Meet: Network Formation with Introductions


Abstract: This paper proposes a parsimonious model of network formation with introductions in the presence of intermediation rents. Introductions allow two nodes to form a new connection on favorable terms with the help of a common neighbor. The decision to form links via introductions is subject to a trade-off between the gains from having a direct connection at lower cost and the potential losses for the introducer from lower intermediation rents. When nodes take advantage of introductions, stable networks tend to exhibit a minimum of clustering. At the same time, intermediary nodes have incentives to protect their position, and stable networks can exhibit bridges across otherwise unconnected parts of the network earning intermediation rents.

Keywords: intermediation; introductions; network formation; networks; clustering;

JEL Classification: A14; D85;

https://doi.org/10.26509/frbc-wp-202001r

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Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2021-06-18

Number: 202001R

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