Discussion Papers in Economics
Communication Networks with Endogeneous Link Strength
Discussion Paper 08-15
Indian Statistical Institute, Delhi
7, S. J. S. Sansanwal Marg, New Delhi 110016, India
Communication Networks with Endogenous
Francis Bloch, Bhaskar Dutta †
September 1, 2008
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 can allocate across links, and in the
baseline model, suppose that link strength is an 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 on the investment technology and the
reliability measure, other network architectures can emerge as efficient
JEL Classification Numbers: D85, C70
Keywords: communication networks, network reliability, endoge-
nous link strength.
∗We thank two anonymous referees and the associate editor for their perceptive com-
ments. We have also benefited from discussions with C. Blackorby, S. Goyal and M.
Jackson and from the comments of participants in seminars and conferences at Brescia,
CORE, Guanajuato, University of Maryland at College Park, Montpellier, Montreal, Paris
†Bloch is at Ecole Polytechnique, 91128 Palaiseau, France. He is also affiliated with the
University of Warwick. Dutta is in the Department of Economics, University of Warwick,
Coventry CV4 7AL, England.
Following a long tradition in sociology, economists have recently focussed
attention on the role of social networks in economic activities. One of the
main contributions of this emerging literature has been to propose strategic
models of network formation, where self-interested