  We study network games in which players choose both the partners with whom
they associate and an action level (e.g., effort) that creates spillovers for
those partners. We introduce a framework and two solution concepts, extending
standard approaches for analyzing each choice in isolation: Nash equilibrium in
actions and pairwise stability in links. Our main results show that, under
suitable order conditions on incentives, stable networks take simple forms. The
first condition concerns whether links create positive or negative payoff
spillovers. The second concerns whether actions are strategic complements to
links, or strategic substitutes. Together, these conditions yield a taxonomy of
the relationship between network structure and economic primitives organized
around two network architectures: ordered overlapping cliques and nested split
graphs. We apply our model to understand the consequences of competition for
status, to microfound matching models that assume clique formation, and to
interpret empirical findings that highlight unintended consequences of group
design.
