  We experimentally study effort provision and network formation in the
linear-quadratic game characterized by positive externality and complementarity
of effort choices among network neighbors. We compare experimental outcomes to
the equilibrium and efficient allocations and study the impact of group size
and linking costs. We find that individuals overprovide effort relative to the
equilibrium level on the network they form. However, their payoffs are lower
than the equilibrium payoffs because they create fewer links than it is optimal
which limits the beneficial spillovers of effort provision. Reducing the
linking costs does not significantly increase the connectedness of the network
and the welfare loss is higher in larger groups. Individuals connect to the
highest effort providers in the group and ignore links to relative low effort
providers, even if those links would be beneficial to form. This effect
explains the lack of links in the network.
