lOMoARcPSD|7636504 Network Economics - lectures Network economics (Radboud Universiteit Nijmegen) StudeerSnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 Network Economics – lectures Lecture 1 – welcome and introduction to the course 1. 2. 3. 4. Intro Measuring networks Determinants of networks Consequences of networks One lab for every topic Assignment over the last two topics Networks comes from the field of sociology and made its way into physics and later into economics 6 degrees of separation (Milgram): - Need to know by first name Write down your name when you hand over the letter On average there where 6 letter handovers until it came to its destination. Nodes: actors. Lines: ties, links, lanes or edges. network is a collection of both. On Facebook there is three and a half degrees of separation it keeps shrinking Epidemiology and neuroscience benefit a lot from networks. Especially the financial sector after 2008 risk can spread like a virus. Why study networks: - Trade: what alliances to entre and what conflicts to undertake depend on what alliances other countries have. Will only have a conflict with a country that will not affect your own alliances. Voting: informational and social messages have a direct effect. Social message had a stronger effect, actions of your social connections have an effect on yourself. Smoking: big influence of your surroundings on your decision to start smoking, Relational thinking - Who is ‘connected’ with/to whom? Who are the actors (nodes)? What is the connection (links)? Networks at play: - Can sometimes have direction in your network f.e. who do you go to for advice Trust network who trusts who? no direction because they trust each other. Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Each network can show a very different picture. Need to get different views Network concepts: - The dyad: two nodes that are connected - o The triad: three nodes that may or may not be connected o - When there is a triad, social norms start to emerge In an open triad, if you are B, you are in a position of power. Simmelian tie: like a closed triad Structural hole: like an open triad. Position within a network can influence your behaviour In data: 0 = no relationship, 1 = relationship. Attributes: information about the nodes. Lecture 2 – measuring and characterising networks + overview of IOR - Used network economics to find Saddam Hussein and to build his network based on informal aspects. Popularity: - Look at incoming ties in-degree centrality o Can mean that a lot of people reach out to you o About how people react to you o Could mean a position of power o How many connections are incoming, doesn’t matter whether or not they are connected with each other too. o Can see it as trade links o How do you define the link? type of connections matter Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - o Number of outgoing ties out-degree centrality o How many ties are going out? o Doesn’t have to be equal o Position in a network: - Determines opportunities and constraints Central position might become even more central over time Does a high and rising number of friends have consequences Are there disadvantages? In friendship a high outdegree may not have a high indegree so think they have a lot of friends but are actually not very popular Advice network: o Sign of knowledge, tenure and power with many requests for advice. o A high outdegree signals the opposite need a lot of help from others. Betweenness centrality connect more people to each other. Bridging networks. Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - - - Identifies the gatekeepers within the network Have more paths running through them, allowing them to pass (or restrict) information to others in the network They are sometimes in the position to benefit from privileged access to multiple sources of information A higher betweenness centrality o Connect different groups and are sometimes the only link between them o Have control over communication flows in the network o May act as intermediaries A = 0 don’t need to go through A to get everywhere For C: G B, G A, F B etc. 8 Can also look at speed/distances - Diane has the highest central Fernando and Garth have a higher between centrality they are at a shorter distance. Easiest for them to reach any part of the network. Betweenness centrality = heather. Ike and Jane would be excluded without her. Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Both have the same degree centrality but they are not equally important. B is connected to actors that have a higher degree centrality and that is why B is more important. Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 Eigenvector centrality of a node as a function of the centralities of its neighbours it matters who you are connected to. (don’t need to learn the formula) - Capital is the connection between the Dutch and the French part of Belgium 2 separated communities so little interconnectedness Community: - Group of nodes that have a higher likelihood of connecting to each other than to nodes from other communities Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Miscommunication and disagreements caused part of the club to support one person and the rest the other. Detecting communities, clusters and components in large networks Understanding how different network structures reflect different group/node characteristics How behaviours diffuse within and across communities Notion of group only allows for binary membership status, while network consideres varied levels of embeddedness and commitment A group appears as a cohesive whole, while a network allows for multiple memberships and interests (whether in agreement or conflict) o - Bottom-up approach: - Subcultures build up from dyads and triads to more extended dense clusters Cliques, members all know each other: o Generalizes the triangle Larger cliques are rare, triangles frequently appear Requiring a community to be a complete subgraph may be too restrictive, missing many other legitimate communities N-cliques o o o - Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 o - N-clans o Members of n-cliques are connected by actors who are not members of the clique difficult to interpret o One may add the restriction that all ties among members of an n-clique must occur by way of other members of the n-clique o N-clan rule o Alternative to the stricter clique definition o Reachability: important social processes Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 o o Except for 1 there is a distance of two for everyone N-clan rule: only 2,3,4,5,6 6 is not a member of the clique Top down approach: - Sub-structures as areas of the graph that are locally dense, but separated form the rest to some degree Components: sub-graphs that are connected within, but disconnected between sub-graphs - Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 Forms of interorganisational networks: - Need to look into this. They are separated and need to match the right ones Read the paper that is connected to this Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 Lecture 3 – network determinants Who are the organisations? o o Types of organisations and collaborations that will be discussed What defines the tie? In a network equation - Portfolio view (focal firm) o Look at the number of ties per node Dyad view: pair of two nodes, want to extract every pair that you have in the network and determine the number of ties within the dyad (can be 0). Are there any ties between a pair of nodes? Key terms: - Organisational boundaries: boundaries separating specialised sub-units/organisations from each other and from external areas Boundary spanner: actors who understand the coding schemes from the different sides of the boundary Reasons: - Acquire resources Reduce uncertainty Enhance legitimacy Attain collective goals From reasons to conditions that facilitate the creation of inter-organisational networks Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 Determinants: - Learning Trust Norms and monitoring Equity Trust - A priori trust how to determine which one is the most trustworthy indegree centrality, look at closeness centrality Interpersonal trust Inter-organisational trust Deterrence Calculative Institutional Relational Norms and monitoring - Reciprocity you do something for me, I do something for you. Put in the same effort that the other is. Rules of behaviour measured with closeness centrality. What is expected from you? Network identities develop in a form of somebody that is behaving according to the norm Equity - Power market share, customer base, Status Relative relative power and status difference, if somebody is much better or lower you are less likely to collaborate. Lecture 4 – network determinants (part 2) Goal: - Strategic alliances can help alleviate environmental uncertainty, but entering alliances in its own poses’ uncertainty The setting: - Organisations create stable, preferential relationships thereby reducing moral hazard problems Over time, these embedded relationships accumulate into a network that becomes a growing repository of loads of information on prospective partners Allowing organisations to search the network for future alliance decisions. Why is there a need for information? - Strategic alliances can help alleviate environmental uncertainty, but entering alliances in its own poses’ uncertainty Competencies and needs of partners o Organisations needs are multifaceted, ambiguous and not publicly available o In which settings could this be even worse? Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Cultural differences, privately owned, distance Reliability of potential partners o Moral hazard o In which settings could this be even worse? Large investments (in-balance), different cultures/laws, Possible explanations - - - - - Interdependence: encompass accessing capabilities and resources, share the costs and risks of technology development, enter new markets, pursue resource specialisation strategies o The probability of a new alliance between two organizations increase with the level of interdependence between those organisations Interorganisational embeddedness: relying on information provided by existing interorganisational networks. E.g. board interlocks, trade associations, research and development ventures o Relational embeddedness: previous direct alliances o Structural embeddedness: indirect alliances ties through third parties Know the needs of the partner, and if the other partner is able to offer some of the need of the partner you know what they have to offer. o Positional embeddedness: reputation resulting form the potential partner’s position in the network of pre-existing alliances Prior ties/relational embeddedness o Provide channels through which each partner can learn about the competencies and the reliability of the other o Amplify trust and diminishes the uncertainty associated with future partnerships o The probability of a new alliance between two organisations increases with the number of prior direct alliances between those organisations Structural embeddedness: o Frame of reference shifts form the dyad to the triad o Indirect channels for information and reputation effects o Sharing common ties May indicate that both are regarded as suitable and trustworthy by the same organisations May signal that the partner can cooperate with the same kind of organisations Can create a reputational lock-in whereby good behaviour is ensured through a concern of local reputation. o The probability of a new alliance between two organisations increases with the number of prior indirect alliances between those organisations Positional embeddedness: o Having a particular position in the network of alliances give informational benefits about potential partners o Central actors have a more accurate representation of the existing network o Overall central actors lower their level of uncertainty about partnerships o Central actors are also more attractive partners o The probability of a new alliance between two organisations increases with the combined alliance-network centrality of those organisations The higher the centrality the better o The probability of a new alliance between two organisations increases with the similarity in alliance network centrality between those organisations. About similar centralities Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 Empirics - Dependent variable: 0 or 1 if they have a tie or not. Operationalisation: o Interdependence: the extent to which organisations may need each other to access critical resources and capabilities. Firms that belong to the same sector will be more complementary o Relational embeddedness: the extent to which a pair of organisations had direct contact with each other in the past o Structural embeddedness: the extent to which a given pair of organisations shared common partners from past ties o Positional embeddedness: the extent to which the organisations in a dyad occupy similar or different network positions Lecture 5 – consequences of networks and relations at the organisational level study this with the powerpoint Consequences of interorganisational networks: - Imitation o Information transmission leads to imitation o Diffusion: adoption of practices through awareness information on costs and benefits of adoption at a greater level of detail and persuasiveness o o o o o Simulate how the diffusion of practices would happen Assume that everything you learn from each other is beneficial 5/3 most beneficial. ½ uncertain. Managers are unlikely to change the strategy even if things go bad everyone else is wrong but they are correct Systematic biases perceptual distortions Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - - - o Rely on social networks to get advice. but they might all have the same views/ideas o Innovation o Firms in close proximity to each other gain knowledge spill overs o Networks shape innovation input R&D investment o Market signal: new product awards in technically intensive industries o Firm survival o Liability of newness lack of stable exchange relations and a lack of access to resources make new firms particularly prone to fail o Network ties with legitimated symbols in an organisational field also affect survival o SSA site sharing arrangements: operate in space leased from or provided by community based, educational and social service oriented organisations including community centres, public schools and churches day cares with more ties to community organisations and government agencies have much lower death rates Performance o Strength of ties Increases sales growth for new businesses Balance of strong and weak ties most effective A main effect can still be obtained when visible network ties are interpreted as a signal of quality that confers status on a firm, and thus increases the price of its products and services o Centralised or decentralised networks Centralisation decreased effectiveness as perceived by providers but increased effectiveness as perceived by users Network centralisation: Refers to the power and control structure of the network, or whether network links and activities are organised around any particular one or small group of organisations Core agency centrality: whether the core agency, often a community mental health centre, is central in the flow of services Concentration of influence: whether influence over decisions related to clients was concentrated in a single organisation. It may be that decentralised networks are superior when they are organised according to small world principles Local clustering into dense subnetworks, short paths between actors and relatively few ties. bridges span dense clusters and connect different parts so that resources go from cluster to cluster Improve rewire so that there are short custs between clusters that minimize the average path distance Network perspective: whole network vs ego network Whole/complete network Focus on the whole group global structure Ego/personal network Focus on individual ego networks: local structure Patterns of interaction used to explain: - Concentration of power - Flow of information or resources Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Status structures Cases are complete networks generalised to other networks Cases are individual ego networks generalised to other ego networks Whole networks: - Mapping the whole set of ties to fa particulat type of a particular group, setting or population Not focussed on one particular person or entity Network boundaries must be well-defined Personal networks: - Social environment The whole set of contacts of one person or entity Usually includes attributes of alters and ties between them Usually collected for a sample of egos Graphically represented with ego at its centre - Size: number of nodes (alters) that the ego is directly connected to Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Number of directed ties number of connections among all the nodes in the ego network Number of ordered pairs number of possible ties in each ego network Density number of ties divided by the number of pairs - Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Effective size: the number of alters – the average degree of alters within the ego network, not counting ties to the ego o Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 o - - o Efficiency: the effective size / number of alters o Constraint: measure of the extent to which ego is invested in people who are invested in other of ego’s alters o Individual constraint and aggregate constraints o Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Hierarchy: extent to which constraint on ego is concentrated in a single alter o Which perspective to use? - Depends on the research question What aspects/characteristics of networks might matter? - Network structure Position in a network Network composition not just about how strong or how many, also matters to whom you are connected the same kind of companies or not. How homogenous or not your network is. Lecture 6 – consequences of networks and relations at the organisational level (part 2) What network structures can lead to better innovation. Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 Closure Intense communication Trust Social sanctions Social capital consists of closed structures: - Ties among parents, teachers and other adults ensure child does homework and succeeds in life Structural holes Control of information Opportunities strength of weak ties Power Autonomy More non-redundant information - Managers higher compensation, performance evaluations, promotions, good ideas Innovation – the role of network structure - - - Q: is information collection more efficiently done in networks with closure or in networks with structural holes Two studies done in the same year, one in Canada and one in the chemical industry. (see slides) o Found very different outcomes about which structure is better o Start-ups need more openness to gain more access to more information. Strong or weak ties? o Strong ties: trust and fine-grained information exchanges between partners o Weak ties: novel information, access to divergent regions of the network o Usually have a mix of both, most beneficial depends on the context, and which ties do you have more of o Cohesive/intensive ties involve substantial investments while weaker linkages are usually about marketing and licensing agreements/standards and training arrangements. Exploitation refinement and extension of existing competencies, technologies, paradigms, using existing information to improve efficiency and returns from present strategies etc. Exploration experimention with new, uncertain alternatives; searching and experimenting to find emerging innovations that will produce future profits Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 o Depends on environmental conditions level of uncertainty Vasudeva, G., Zaheer, A., & Hernandez, E. (2013). The embeddedness of networks: Institutions, structural holes, and innovativeness in the fuel cell industry. Organization Science,24(3), 645-663. Embeddedness of networks Institutional context laws/rules you have to follow/more about the environment and how you need to operate in that environment - - - Corporatism: characterize the nature of collaboration, participation and exchange among actors within a society in the process of achieving collective goals. High: o Hierarchically structured and functionally differentiated groups o Relationships often cemented through business confederations, industry associations etc. o Japan, Germany Low o Industry groups tend to arise to address narrow issues of mutual interest, dissolving once those issues are less salient to members o Individualism and competitiveness o US/UK Approach innovation in unique ways Structural holes and innovativeness: - Value of structural holes: ability of an actor to obtain and meld together diverse, nonredundant information from partners not directly connected to each other Innovation recombination of existing knowledge for new applications. Conditions: o Partners to which the broker is tied should each possess nonredundant knowledge o Broker must be capable of managing a diverse array of partners and drawing out, absorbing and recombining the knowledge obtained from its partners in creative ways o Knowledge flows occur from the partner to the broker Gedownload door Mercan Porter (potet70074@netjook.com) lOMoARcPSD|7636504 - Don’t need to memorise the formula but need to explain how it works. About understanding About understanding the concepts o o o o o Measures closed networks, the higher the closer the higher the constraint It means more connections between alters the higher the constraint measure The more alters, the lower the constraint Is the network more closed or open? more or fewer structural holes. If it is normalised it is between 0 and 1. Broker corporatism: - - Collaborative norms present in the corporatist home country of the broker enable it to better manage the knowledge integration process so crucial for structural holes to deliver innovation Structural holes put the broker in a position in which it must manage diversity Collaborative norms and capabilities particularly useful when the firm spans structural holes because it finds itself in a position in which it encounters a similar imperative to manage diverse interests Corporatism facilitates absorptive capacity Have the effect of structural holes on innovative companies, use interaction effect. Positive relationship. (see slides) Patent = innovative performance Alliance partner = alter Assignment about the consequences of network innovation (increase in innovation) Motivate better why we excluded all the other companies also with the hypothesis. The size would make sense. Analysis would be restricted to a few observations which would need to be addressed. Final lecture Gedownload door Mercan Porter (potet70074@netjook.com)
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