Experiments with Network Economies

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Recent research suggests that the network structure in which individuals interact may have important economic consequences. For instance, while cross-country linkages between financial markets can be beneficial for diversification it also opens up the possibility of contagion of bad outcomes. In general, the network structure may determine which of several possible economic outcomes or `equilibria' are chosen and it may also affect the speed with which coordination on a particular equilibrium occurs. Besides studying behavior for a given network structure, the endogenous emergence of efficient network structures has also become an important theoretical research topic. To date, however, there has been little research of an applied nature. In this project we empirically test this theoretical work using controlled laboratory experiments with paid human subjects. These experiments advance our knowledge of whether network structures matter for equilibrium selection, and whether and when certain network structures arise endogenously. These are critical questions that lie at the heart of many poorly understood issues including the susceptibility of financial and other systems to ``panics'', sorting by gender, race or ethnicity, the emergence of trading patterns and trade agreements, technological adoption and ``lock-in'' to inferior technologies, and organizational design.