Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2010:20: Social Interactions and Spillovers

Antonio Cabrales (), Antoni Calvó-Armengol and Yves Zenou ()
Additional contact information
Antonio Cabrales: Universidad Carlos III de Madrid, Postal: Department of Economics, Universidad Carlos III de Madrid, Madrid 126, 28903 Getafe, SPAIN
Antoni Calvó-Armengol: Universitat Autònoma de Barcelona, Postal: ICREA, Universitat Autònoma de Barcelona, Spain
Yves Zenou: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden, IFN and CEPR

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: Peer effects; network formation; welfare

JEL-codes: L22; L51; O31; O38

37 pages, November 8, 2010

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