"Endogenous Network Formation: Theory and Applications"

Luedtke, Allison, Economics - Graduate School of Arts and Sciences, University of Virginia
Young, Eric, Department of Economics, University of Virginia

The first chapter of this dissertation describes a new model of endogenous economic network formation, and the two chapters that follow describe applications of this model. The model described in the first chapter features a finite set of economic agents who choose to form relationships with one another. As part of this model, I present a new definition of equilibrium networks. I describe the model and discuss an illustrative example. In addition to demonstrating the power of a network formation model, I present algorithms for computing equilibrium networks.

In the next chapter, I apply this model to firms choosing input suppliers and forming a production network. I analyze the effect of a single firm losing its equilibrium input supplier. I show that when one of these firms loses its input supplier, aggregate output may actually increase. Simulations of the model indicate that this increase in output is more likely when (1) the firm that loses its supplier has fewer customers prior to losing its supplier and more customers after losing its supplier, and (2) the production network as a whole is relatively less interconnected prior to the input removal and more interconnected after the input removal.

In the final chapter, I again apply the model to the formation of production networks. However, in this chapter, I use it to investigate the effect of the application of an ad valorem tariff to a single product in the production network. Simulations of this model indicate that even when the tariff is applied to only a single product, on average, prices paid by consumers increase for all goods in production. I find that consumer prices are likely to be higher after the tariff is applied when (1) the production economy is less interconnected, and (2) when the product to which the tariff is applied is used as an input by many other firms.

PHD (Doctor of Philosophy)
Economic Networks, Production Networks, Tariffs, Network Formation
Issued Date: