Essays on Network Games

Abstract

This dissertation analyzes three models of applied network games. The primary focus of the models is to utilize network settings, as a tool of discretization and representation of friction in relationships, in establishing causal relationships between observed variables, including hierarchical structure and welfare in corporations, monopsony power and polarization, and cost of transaction channels and vanishment of markets.In Chapter 2 of this dissertation, entitled ``Incentives in Information Hierarchy: Why Middle Managers Suffer," I endogenize the provision of incentives in a hierarchical information network. Leaders in the hierarchy directly observe the state of common productivity and exert effort accordingly. Followers in subsequent tiers must infer the state by observing the effort of a member one tier above them. This generates a network game in which all members, except those without followers, have \textit{signaling obligations}. The question I address is how the division of output influences incentives within this game. I show that the socially optimal division implies that signaling obligations reduce compensation and payoffs. In contrast, when a leader chooses the division of output to maximize her own payoff, members in the middle of the hierarchy receive the lowest payoffs. This result is consistent with numerous studies that find middle managers suffer the highest burnout rate in large firms and organizations. In the context of my model, this occurs because middle managers have relatively large signaling obligations and low compensation.In Chapter 3 of this dissertation, entitled ``The Polarization Effect of Monopsony: The Cases of Lobbying and Suburbanization," I explore how the rise in lobbying investments may have contributed to the polarization of politicians, a relationship that has been empirically supported but in contrast to the predictions of the Median Voter Theorem. I model the choice of extreme platforms as a form of rent-seeking behavior by politicians. The model demonstrates how polarization, defined as more politicians opting for extreme platforms over centrist ones, can emerge from non-polarized primitives. A key mechanism is the monopsony power that benefactors have to adjust lobbying investments. Additionally, the model is applied to explain the suburbanization of the manufacturing industry as a consequence of rising monopsony power. The latter model differs from the former in that benefactors have agency in choosing their locations.In Chapter 4 of this dissertation, entitled ``Under-investments in Buyer-Seller Network," I establish an inefficiency result on buyer-seller network formation models. I assume that buyers and sellers randomly meet each other sequentially and negotiate to form links. Strategic tension arises as the link provides opportunities for transaction while being costly to form. The major result shows that under-investment in network (i.e. less links than socially efficient) would arise when links are sufficiently costly. This result suggests a potential market failure in markets with high transaction friction.