Potential games in volatile environments

This paper studies the co-evolution of networks and play in the context of finite population potential games. Action revision, link creation and link destruction are combined in a continuous-time Markov process. I derive the unique invariant distribution of this process in closed Form, as well as the marginal distribution over action profiles and the conditional distribution over networks. It is shown that the equilibrium interaction topology is an inhomogeneous random graph. Furthermore, a characterization of the set of stochastically stable states is provided, generalizing existing results to models with endogenous interaction structures. (C) 2010 Elsevier Inc. All rights reserved.