This paper shows that the relationship between social networks and cooperative trading is a two-way street. The possibility of cooperative trading enforced by third-party sanctions provides players with incentives to form costly links, and investing in costly links increases the power of...

The present paper proposes a simple model for studying the interplay between self-enforcing cooperation and network formation. In particular, the model provides an answer to the ancient question of how cooperative behavior emerges in different communities and how the possibility of behaving...