Coordination, Local Interactions and Endogenous Neighborhood Formation

The paper studies the evolution of coordination in a local interaction model where agents can simultaneously choose the strategy to play in the game and the size of their neighborhood. We focus on pure-coordination games played by agents located on one-dimensional lattices when network externalities become eventually negative as neighborhood sizes increase. We show that the society almost always converge to steady-states characterized by high levels of coordination and small neighborhood sizes. Furthermore, we ...nd that neighborhood adjustment allows for higher coordination than if interaction structures were static and that large populations attain higher coordination provided that average initial neighborhood sizes are not too small. Finally, we explore how long-run patterns of coordination change when: (i) agents possibly enjoy positive network externalities as neighborhood sizes increase; (ii) individuals are placed in higher-dimensional lattices; (iii) agents play coordination games where a trade-o¤ arises between Pareto-e¢cient and risk-dominant Nash equilibria.