A degree-distance-based connections model with negative and positive externalities

We develop a modification of the connections model by Jackson and Wolinsky (1996) that takes into account negative externalities arising from the connectivity of direct and indirect neighbors. Our model combines then different aspects of the connections model and the co-author model and can be seen as a degree and distance-based model with both negative and positive externalities. Consider a situation in which people are involved in projects and generate some kind of knowledge by themselves, and receive some from others. If an agent is involved in many projects, he will have less time to generate output by himself. On the other hand, the more connections he has, the more knowledge he will receive from others which he can then forward to his neighbors. We analyze pairwise stability and efficiency in this modification of the Jackson and Wolinsky model in order to understand how the negative externalities modify the results of the original connections model. JEL Classification: D85, C70