Nash Equilibria on (Un)Stable Networks

In response to a change, individuals may choose to follow the responses of their friends or, alternatively, to change their friends. To model these decisions, consider a game where players choose their behaviors and friendships. In equilibrium, players internalize the need for consensus in forming friendships and choose their optimal strategies on subsets of k players-a form of bounded rationality. The k-player consensual dynamic delivers a probabilistic ranking of a game's equilibria, and via a varying k, facilitates estimation of such games. Applying the model to adolescents' smoking suggests that: (a) the response of the friendship network to changes in tobacco price amplifies the intended effect of price changes on smoking, (b) racial desegregation of high schools decreases the overall smoking prevalence, (c) peer effect complementarities are substantially stronger between smokers compared to between nonsmokers.

Automated summary

The model suggests that in social networks, the response of the friendship network to changes in tobacco price amplifies the intended effect of price changes on smoking among adolescents, racial desegregation of high schools can decrease the overall smoking prevalence, and peer effect complementarities are substantially stronger between smokers compared to between nonsmokers.