Learning, Network Formation and Coordination

In many economic and social contexts, individual players choose their partners and also decide ona mode of behavior in interactions with these partners. This paper develops a simple model toexamine the interaction between partner choice and individual behavior in games of coordination.An important ingredient of our approach is the way we model partner choice: we suppose that aplayer can establish ties with other players by investing in costly pair-wise links.We show that individual efforts to balance the costs and benefits of links sharply restrict therange of stable interaction architectures; equilibrium networks are either complete or have the stararchitecture. Moreover, the process of network formation has powerful effects on individualbehavior: if costs of forming links are low then players coordinate on the risk-dominant action,while if costs of forming links are high then they coordinate on the efficient action.