Structural Holes

Abstract

We consider a setting where every pair of players that interact (e.g. exchange goods or information) create a surplus. An interaction can take place only if the players involved have a connection. If the connection is direct the two players split the surplus equally while if it is indirect then intermediate players also get a share of the surplus. Thus individuals form links with others to create surplus, to gain intermediation rents and to circumvent others who are trying to become intermediary. Our principal result is that strategic link formation in such a setting leads to the star network. In a star a single agent acts as an intermediary for all transactions and there is significant payoff inequality across ex-ante identical players.

1 Introduction

It is now widely agreed that knowledge of the structure of interaction among individuals is important for a proper understanding of a number of important questions in economics,such as the spread of new ideas and technologies, the patterns of employment and wage...