Abstract: In the context of endogenous network formation, players can only play coordination game with their direct neighbors. In the network formation process, the cost of link formation is heterogeneous (with two levels), and players would bear high-level costs when establishing links with players who choose an efficient action, and would bear low-level costs when establishing links with players who choose a risk-dominated action. In the case of heterogeneous link costs, the paper firstly gives an explicit description of the nature of network structure and players' choices in the equilibrium outcomes, and has analytically studied how the cost of link formation affecting the equilibrium outcomes.

Key words: network game, local strategic interaction, heterogeneous link cost, endogenous network formation, coordination game