Coordination in Evolving Networks with Endogenous Decay

This paper studies an evolutionary model of network formation with endogenous decay, in which agents benefit both from direct and indirect connections. In addition to forming (costly) links, agents choose actions for a coordination game that determines the level of decay of each link. We address the issues of coordination (long-run equilibrium selection) and network formation by means of stochastic stability techniques. We find that the long-run behavior of the system depends on a fine interplay of the link cost and the trade-off between efficiency and risk-dominance.