The Network Dilemma

This paper introduces and studies the Network Dilemma, which embeds a social dilemma within a network formation game. The game models the voluntary provision of a costly public good that is locally non-excludable within an endogenously formed network of agents. In this environment, all equilibrium networks are star networks that exhibit ex-post payoff inequality between the central public good provider and peripheral players. We observe high levels of equilibrium behavior, despite the coordination problem faced by the ex-ante homogeneous subjects. In our treatments with a moderate level of ex-post payoff inequality, coordination on a star network appears to be facilitated by subjects who signal a willingness to volunteer as the center persistently. We use a sequential version of the Network Dilemma, and a diagnostic treatment, to end that aversion to behavioral uncertainty is the main motivating factor behind voluntary public good provision in the Network Dilemma