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Markets and Networks

Final Report Summary - NETWORKS (Markets and Networks)

The project has led to major advances in the economics of social connections and social networks. (1) We provide the first analysis of favoritism and show that favoritism and favor exchange are easier to sustain in the presence of frictions in economic exchange, in small homogenous groups and when there is heterogeneity in groups. We show that favoritism has first-order negative effects on investments and innovation, consistent with empirical evidence. (2) We develop the first statistical method able to disentangle favoritism from information effects in the impact of connections on hiring or promotion. Our method does not rely on hard-to-build measures of true ability, and only relies on observable data on candidates and success. (3) We provide the first analysis of altruism in networks. We consider a context where agents are embedded in a fixed network. They care about the well-being of their network neighbors and may provide financial support. We show that altruistic transfers generally reduce inequality and help agents smooth consumption. However, we also find that a reduction in income inequality or an expansion in altruism can lead to an increase in consumption inequality and variability. (4) We provide the first analysis of the interactions between a rent-seeking political elite, an economically dominant market minority and a poor majority. When the threat of violence is high, the government can strategically sacrifice the minority to popular resentment. Such strategic scapegoating may be alleviated by social interactions between the two elites. (5) We propose new measures of network centrality to capture the influence of an agent on the diffusion of an information in a network. We show that our proposed measures are more appropriate in important contexts, such as political intermediation, and provide explicit formulas to compute them.