Allison Oldham Luedtke

Ph.D. Candidate

The University of Virginia

Research Interests:
Network Economics, Mathematical Economics, Macroeconomics

Job Market Paper Title:
Endogenous Network Formation: Theory and Application
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Abstract:
Economic networks have become a useful modeling tool. However most of the current literature on economic networks takes the networks themselves as given. This paper presents a model of endogenous network formation. Individual economic agents choose to form relationships with one another, thereby forming the links of a network. I describe an application of this model in the context of firms choosing input suppliers, forming a production network and analyze the outcome of a single firm losing its equilibrium input supplier. I show that when one of these firms loses its input supplier, aggregate output may actually increase. Simulations of the model indicate, on average, that when a firm loses its input supplier, the drop in output is smaller when: (1) the firm which loses its input supplier has a larger number of alternative suppliers to choose from and (2) the original equilibrium network is less connected. In the absence of this endogenous network formation, the answers to some economic questions, such as the effect of tariffs on international trade networks or the effect of regulation on air traffic networks, may not only be quantitatively incorrect but qualitatively incorrect.