Socio-economic networks and groups
The research activity of the Coalition Theory Network is centred on the theoretical
and empirical analysis of socio-economic networks and groups. This attains
to different aspects of social and economic systems, including the management
of international public goods, to the governance of economic unions, to
the formation of industrial cartels and collaborations, to the patterns
of racial integration in social networks, the endogenous evolution and structure
of institutions, etc.
It is now widely agreed within the international scientific community that
such crucial phenomena call for a unifying theoretical approach, based on
the development of behavioural models and equilibrium concepts, and for
an extensive investment in empirical research. The last two decades have
witnessed a huge academic effort in this direction, especially within the
disciplines of economics, game theory and behavioural sciences in general.
Moreover, a growing interest in social and economic networks has been fostered
by recent developments in the analysis of strategic network formation, and
by a more and more intense integration between this new body of research
and earlier work on the formation of large networks, developed in the mechanical
physics literature.
A review of the state of the art
The theory of coalition formation focuses on the analysis of the
incentives of economic agents to communicate and on how these incentives
act on the determination of equilibrium configurations of social and economic
groups. It has developed as the natural extension of traditional co-operative
game theory; however, while this mainly focused on the problem of how the
surplus of cooperation "should" or "will" be shared
among cooperating agents, the theory of coalition formation has extended
the set of questions in two main ways. Firstly, it investigates how groups
form, and which configuration of groups will emerge in equilibrium. The
formation of multiple groups is consistent with the recent experience of
international negotiations on environmental standards and on trade issue,
where "small" coalitions are the rule rather than the exception,
even when full cooperation would be desirable. A second important extension
of the set of questions addressed by coalition theory is the study of problems
in which the welfare of a group can be affected by the actions taken by
agents that are members of other groups, that is, when there are externalities
among groups. Such externalities are typical, for example, of cartel formation
in oligopolies, of cooperation on environmental policies, of economic unions.
In order to account for these empirical regularities, theorists have taken
new approaches to the problem, which can be classified as follows.
Formulation of new game-theoretic models of coalition formation and networks.
In these models, the choice of forming a coalition is modelled as a
strategic variable of each player emerges as the outcome of pure non-co-operative
behaviour. We can further distinguish between static models (e.g., Hart
and Kurz (1983)) and dynamic models of coalition formation (e.g., Chatterjee,
Dutta, Ray and Sengupta (1993), Bloch (1996)).
Formulation of new solution concepts. Here, the effort is aimed at
identifying equilibrium coalition structures that satisfy consistency requirements
both within and outside forming coalitions (e.g., Ray and Vohra (1997)).
Other new solution concepts address situations where agents are far-sighted
(eg. Dutta, Ghosal and Ray (2005), Page, Wooders and Kamat (2004)). There
is also a need for dynamic models and solution concepts that adequately
capture the most salient features of real-world situations.
The interest of economics and other behavioural sciences for network theory
is more recent, and has mainly developed after the seminal works of Myerson
(1991) and of Jackson and Wolinsky (1996). This interest is motivated by
the number of economic phenomena that are affected, in one way or another,
by the communication network in which agents are embedded. Job contact networks
and trade networks are only two of the many examples one may cite. What
is important here is that both the aggregate welfare and its distribution
seem to depend on how information flows on the network, making a clearer
understanding of how networks form a key issue in economics.
Models of network formation have been previously developed within the mechanical
physics literature, addressing the issue of how large networks form as the
outcome of purely mechanical random processes. The more recent economics
literature focuses instead on the incentives of rational agents to establish
links and form networks as the outcome of optimal behaviour, and on the
welfare implication of such behaviour. It is now commonly agreed within
the scientific community that a bridge between these two literatures needs
to be built, in order to study incentives and welfare within complex architectures
of the type encountered in social networks, in which randomness clearly
plays a role. This tendency is confirmed by the large number of new contributions
on strategic models of network formation that borrow tools and concepts
from the mechanical physics literature.
Recent research on networks has had a strong empirical component, particularly
in topics related to labour economics and consumer behaviour. Peer and neighbourhood
effects on youth have been studied by Sacerdote (2001) and Katz et al. (2001),
and social interactions and crime are the focus of Glaeser (1996) and Kling
et al. (2005). The possibility of social interactions in labour supply is
discussed by Grodner and Kniesner (2006), Weinberg et al. (2004), and Woittiez
and Kapteyn (1998), and the impact of custom on contract design is analyzed
by Young and Burke (2001). The econometric problems in identifying network
effects are complex, and discussed in Brock and Durlauf (2001), Manski (1993),
and Moffitt (2001). Glaeser and Scheinkman (2002) provide an overview of
some of this literature, which is clearly in its infancy but ripe for future
research. An area of particular promise is the study of the evolution and
consequences of new institutional arrangements in the transition economies.
Advancing the state of the art
The theoretical and empirical research on networks and groups is moving
along several directions. Part of these are natural developments of the
existing state of the art, such as the formulation of more general models
and more satisfactory solution concepts that would obtain cooperative outcomes
as the result of equilibrium individual actions and decisions. Other lines
of research respond to the emergence of new and unprecedented social, economic
and political frameworks at both national and international levels, that
raise new theoretical and policy issues. From the theoretical standpoint,
networks and network formation pose the most challenging and new issues
to researchers. Social agents are in many ways organised in a network of
relationships, taking the forms of friendship ties, professional relations,
strategic interaction, physical connections, etc… Network theory needs
to be able to provide a unified framework to analyse the relation between
agents position in the network and their actions and welfare. Even more
generally, a model is needed to explain how the whole structure of the network
(or the beliefs that agents hold in this structure) affect agents behaviour
and welfare. The study of network formation and of games played on networks
under local and limited information is indeed one of the most challenging
and studied issues at present.
Another important theoretical problem is how to model the formation of large
networks and, in particular, how to integrate random network formation models
with strategic models in which agents form links rationally. A bridge between
these two strands of modelling is needed, in order to have predictions on
actual social networks, and to say something about incentives within such
structures.
The lack of data on social networks also suggests that experimental work
in this area will play an important role in empirical research. Experimental
design in this specific topic is therefore another main direction in which
research will exert a great effort. This is true also for the problem of
coalition formation, for which a larger and more established body of theoretical
work exists.
Many interesting questions come from more applied problems, in which the
general models of coalition and network formation are able to provide more
specific predictions. For instance, a recent and successful approach to
group formation consists of the design of procedures to match agents together
in real-life problems such as academic job markets, admission of students
in school or universities (e.g., Roth (1984, 2004)). Recent applications
of matching theory raise new issues such as the problem of strategic behaviour
and asymmetric information in large markets. Also, the design of efficient
and stable voting rules can be fruitfully applied to EU decision making
problems. More in general, the design of stable and efficient self-enforcing
institutions seems to be among the main objectives of coalition theory,
especially in an evolving world context in which political equilibria are
still to be found. In this respect, a fruitful area of research is the investigation
of how domestic political incentives and institutions affect the behaviour
of countries at the international level, and thereby the outcome of treaties
and cooperation. Here the theory of coalition formation can be fruitfully
integrated with the theory of networks, the latter studying the formation
of bilateral international relations, while the former studying the stability
of economic and political unions.