Strict Nash networks and partner heterogeneity

This paper extends the two-way flow model of network formation initiated by Bala and Goyal (2000) by allowing for partner heterogeneity. In our model if a player i forms a link with player j, then she pays a cost of c j and gets benefits of V j . Our main result consists of the characterization of strict Nash networks. We find that the introduction of partner heterogeneity plays a major role in dramatically increasing the set of strict Nash equilibria. This result differs substantially from what Galeotti et al. (2006) find in the two-way flow connections model of network formation with player heterogeneity.