Effects of Externalities on Patterns of Exchange

Abstract

     Many real-life examples of exchanges with externalities exist. Externalities of exchange are defined as direct consequences of exchanges for the payoff of actors who are not involved in the exchange. This paper focuses on how externalities influence the partner choice in exchange networks. In an experiment two externality conditions are created such that different exchange patterns are predicted in the simplest exchange network with two structurally different complete exchange patterns, the 4-Line. Predictions concerning exchange patterns and ratios are derived from a generalization of the core from game theory. Hypotheses are derived by comparing the predictions for the experimental conditions and by comparison to data from previous experiments on the 4-Line, without externalities. Hypotheses concerning the changes in exchange patterns were corroborated.