Social preferences on networks

We develop a model of social preferences for network games and study its predictions in a local public goods game with multiple equilibria. The key feature of our model is that players’ social preferences are heterogeneous. This gives room for disagreement between players about the “right” payoff ordering. When preferences are compatible, however, players succeed in coordinating on a refined set of equilibria. How easily the requirements for preference compatibility are met crucially depends on a property of the network structure: neighborhood nestedness. This means that equilibrium selection succeeds in small, tightly connected structures but also in very centralized networks. It fails, in contrast, in loosely connected local interaction structures. We experimentally validate our predictions and confirm the mechanisms on which our theory builds.