PUB - Publikationen an der Universität Bielefeld

We study a model of strategic network formation prior to a Manea (2011a) bargaining game: ex-ante homogeneous players form costly undirected links, anticipating expected equilibrium payoffs from the subsequent bargaining game. Assuming patient players, we provide a complete characterization of generically pairwise stable networks: specific unions of separated pairs, odd circles, and isolated players constitute this class. We also show that many other structures, such as larger trees or unbalanced bipartite networks, cannot be pairwise stable at all. The analysis implies that the diversity of possible bargaining outcomes is small in (generically) pairwise stable networks.