Working Paper: CEPR ID: DP8127
Authors: Antonio Cabrales; Antoni Calvó-Armengol; Yves Zenou
Abstract: The aim of this paper is to provide a tractable model where both socialization (or network formation) and productive efforts can be analyzed simultaneously. This permits a full-fledged equilibrium/welfare analysis of network formation with endogenous productive efforts and heterogeneous agents. We show that there exist two stable interior equilibria, which we can Pareto rank. The socially efficient outcome lies between these two equilibria. When the intrinsic returns to production and socialization increase, all equilibrium actions decrease at the Pareto-superior equilibrium, while they increase at the Pareto-inferior equilibrium. In both cases, the percentage change in socialization effort is higher (in absolute value) than that of the productive effort.
Keywords: network formation; peer effects; welfare
JEL Codes: L22; L51; O31; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| socialization efforts (P36) | productive efforts (J24) |
| intrinsic returns to socialization increase (I26) | equilibrium actions at Pareto-superior equilibrium decrease (D59) |
| intrinsic returns to production increase (E23) | equilibrium actions at Pareto-superior equilibrium decrease (D59) |
| intrinsic returns to socialization increase (I26) | equilibrium actions at Pareto-inferior equilibrium increase (D59) |
| intrinsic returns to production increase (E23) | equilibrium actions at Pareto-inferior equilibrium increase (D59) |
| percentage change in socialization effort (I24) | percentage change in productive effort (O49) |