## Abstract

We propose a new notion of farsighted pairwise stability for dynamic network formation which includes two notable features: consideration of intermediate payoffs and cautiousness. This differs from existing concepts which typically consider either only immediate or final payoffs, and which often require a certain amount of optimism on the part of the players in any environment without

full communication and commitment. We show that for an arbitrary definition of preferences over the process of network formation, a non-empty cautious path stable set of networks always exists, and provide a characterization of this set. Strongly efficient networks do not always belong to a cautious path stable set for a common range of preference specifications. But if there exists a Pareto

dominant network and players value payoffs in a final network most, then this Pareto dominant network is the unique prediction of the cautious path stable set. Finally, in the special case where players derive utility only from a final network, we study the relationship between cautious path stability and a number of other farsighted concepts, including pairwise farsightedly stable set and von Neumann-Morgenstern pairwise farsightedly stable set.

full communication and commitment. We show that for an arbitrary definition of preferences over the process of network formation, a non-empty cautious path stable set of networks always exists, and provide a characterization of this set. Strongly efficient networks do not always belong to a cautious path stable set for a common range of preference specifications. But if there exists a Pareto

dominant network and players value payoffs in a final network most, then this Pareto dominant network is the unique prediction of the cautious path stable set. Finally, in the special case where players derive utility only from a final network, we study the relationship between cautious path stability and a number of other farsighted concepts, including pairwise farsightedly stable set and von Neumann-Morgenstern pairwise farsightedly stable set.

Original language | English |
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Number of pages | 53 |

Publication status | Published - Aug 2015 |

### Publication series

Series | Working paper / The Vienna Institute for International Economic Studies (WIIW) |
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Number | No.1509 |

## Austrian Fields of Science 2012

- 502047 Economic theory