Global Games with Strategic Substitutes

In this paper we use a non cooperative equilibrium selection approach as a notion of stability in link formation games. Specifically, we follow the global games approach first introduced by Carlsson and van Damme (1993), to study the robustness of the set of Nash equilibria for a class of link formation games in strategic form with supermodular payo. functions. Interestingly, the equilibrium selected is in conflict with those predicted by the traditional cooperative refinements. Moreover, we get a conflict between stability and e.ciency even when no such conflict exists with the cooperative refinements. We discuss some practical issues that these di.erent theoretical approaches raise in reality. The paper also provides an extension of the global game theory that can be applied beyond network literature.