Position-specific information in social networks: Are you connected?

Individuals in social networks often imperfectly monitor others' network relationships and have incomplete information about the value of forming new relationships. This paper introduces the Generalized Conjectural Equilibrium (GCE) concept for such settings and completely characterizes the set of GCE networks when players observe only local parts of the network. Incomplete information and imperfect monitoring generate different types of inefficiency. These inefficiencies increase in number and scope as network observation becomes more localized. These results suggest that actual social networks will be structured inefficiently in general.