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Working Paper

Making Friends Meet: Network Formation with Introductions

High levels of clustering—the tendency for two nodes in a network to share a neighbor—are ubiquitous in economic and social networks across different applications. In addition, many real-world networks show high payoffs for nodes that connect otherwise separate network regions, representing rewards for filling “structural holes” in the sense of Burt (1992) and keeping distances in networks short. This paper proposes a parsimonious model of network formation with introductions and intermediation rents that can explain both these features. Introductions make it cheaper to create connections that share a common node. They are subject to a tradeoff between gains from shorter connections with lower search cost and losses from lower intermediation rents for the central node. Stable networks are shown to have high levels of clustering at the same time that they permit substantial intermediation rents for nodes bridging structural holes.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.


Suggested Citation

Siedlarek, Jan-Peter. 2020. “Making Friends Meet: Network Formation with Introductions .” Federal Reserve Bank of Cleveland, Working Paper No. 20-01. https://doi.org/10.26509/frbc-wp-202001