Communication networks with endogenous link strength

This paper analyzes the formation of networks when players choose how much to invest in each relationship. We suppose that players have a fixed endowment that they call allocate across links, and in the baseline model, suppose that link strength is all additively separable and convex function of individual investments, and that agents use the path which maximizes the product of link strengths. We show that both the stable and efficient network architectures are stars. However, the investments of the hub may differ in stable and efficient networks. Under alternative assumptions oil the investment technology and the reliability measure, other network architectures can emerge as efficient and stable. (C) 2008 Elsevier Inc. All rights reserved.