Sequential Network Design

Abstract

We study dynamic network formation from a centralized perspective. In each period, the social planner builds a single link to connect previously unlinked pairs. The social planner is forward-looking, with instantaneous utility monotonic in the aggregate number of walks of various lengths. We show that, forming a nested split graph at each period is optimal, regardless of the discount function. When the social planner is sufficiently myopic, it is optimal to form a quasi-complete graph at each period, which is unique up to permutation. This finding provides a micro-foundation for the quasi-complete graph, as it is formed under a greedy policy. We also investigate the robustness of these findings under non-linear best response functions and weighted networks.