Working Paper: NBER ID: w20669
Authors: Attila Ambrus; Arun G. Chandrasekhar; Matt Elliott
Abstract: This paper studies costly network formation in the context of risk sharing. Neighboring agents negotiate agreements as in Stole and Zwiebel (1996), which results in the social surplus being allocated according to the Myerson value. We uncover two types of inefficiency: overinvestment in social relationships within group (e.g., caste, ethnicity), but underinvestment across group. We find a novel tradeoff between efficiency and equality. Both within and across groups, inefficiencies are minimized by increasing social inequality, which results in financial inequality and increasing the centrality of the most central agents. Evidence from 75 Indian village networks is congruent with our model.
Keywords: social investments; risk sharing; inequality; network formation
JEL Codes: C78; D31; D61; D86; L14; Z13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social investments (E22) | overinvestment within groups (C92) |
| social investments (E22) | underinvestment across groups (I24) |
| redundant social links (Z13) | inefficiencies (D61) |
| Myerson value (C71) | surplus allocation favoring centrally connected agents (D51) |
| structure of social networks (D85) | efficiency of risk-sharing arrangements (D61) |
| increasing social inequality (I24) | minimizing inefficiencies (D61) |
| social network structures (D85) | inequalities in resource distribution (D30) |
| network centrality (D85) | likelihood of forming risk-sharing links (D81) |