Stability in a network economy: The role of institutions

We consider an economy in which agents are embedded in a network of potential valuegenerating relationships. Agents are assumed to be able to participate in three types of economic interactions: Autarkic self-provision; bilateral interaction; and multilateral collaboration through endogenously provided platforms. We introduce two stability concepts and provide sufficient and necessary conditions on the network structure that guarantee existence, in cases ofthe absence of externalities, linkbased externalities and crowding externalities. We show that institutional arrangements based on socioeconomic roles and leadership guarantee stability. In particular, the stability of more complex economic outcomes requires more strict and complex institutional rules
to govern economic interactions. We investigate strict social hierarchies, tiered leadership structures and global market places.