Experimental Evidence on Group Size Effects in Network Formation Games

This paper presents experimental evidence on games where individuals can unilaterally decide on their links with each other. Linking decisions give rise to directed graphs. We consider two classes of situations: one, benefits flow along the direction of the network paths (one-way flow), and two, when the benefits flow on network paths without regard to the direction of links (two-way flow). Our experiments reveal that in the one-way flow model subjects create sparse networks whose distance grows and efficiency falls as group size grows; by contrast, in the two-way flow model subjects create sparse and small world networks whose efficiency remains high in both small and large groups. We show that a bounded rational model that combines myopic best response with targeting a most connected individual provides a coherent account of our experimental data.