Selection, Socialization and Stable Networks

When individuals make decisions or choose behaviors, they are affected by the decisions or behaviours of their friends. In turn, individuals often choose their friend based on similarities in these decisions and behaviours. Kandel (1978) provide emprical evidence that these aspects are present in friendship networks and refers them as socialization and selection, respectively. In this paper, we consider a model of friendship network which reflects both aspects. To capture socialization, we consider a network game where agents with different types choose an action on a certain behaviour to coordinate their action both with their type and actions of friends in network. Agent, then, decide their friends based on the utility of network game under unique Nash equilibrium. We show certain class of networks are pairwise stable.