document: Strategic formation of credit networks Credit networks are an abstraction for modeling trust between agents in a network . Agents who do not directly trust each other can transact through exchange of IOUs ( obligations ) along a chain of trust in the network . Credit networks are robust to intrusion , can enable transactions between strangers in exchange economies , and have the liquidity to support a high rate of transactions . We study the formation of such networks when agents strategically decide how much credit to extend each other . When each agent trusts a fixed set of other agents , and transacts directly only with those it trusts , the formation game is a potential game and all Nash equilibria are social optima . Moreover , the Nash equilibria of this game are equivalent in a very strong sense : the sequences of transactions that can be supported from each equilibrium credit network are identical . When we allow transactions over longer paths , the game may not admit a Nash equilibrium , and even when it does , the price of anarchy may be unbounded . Hence , we study two special cases . First , when agents have a shared belief about the trustworthiness of each agent , the networks formed in equilibrium have a star-like structure . Though the price of anarchy is unbounded , myopic best response quickly converges to a social optimum . Similar star-like structures are found in equilibria of heuristic strategies found via simulation . In addition , we simulate a second case where agents may have varying information about each others ' trustworthiness based on their distance in a social network . Empirical game analysis of these scenarios suggests that star structures arise only when defaults are relatively rare , and otherwise , credit tends to be issued over short social distances conforming to the locality of information .
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