A Belief-Based Theory of Homophily

Abstract

We introduce a model of homophily that does not rely on the assumption of homophilous preferences. Rather, it builds on the dual process account of Theory of Mind in psychology which focuses on the role of introspection in decision making. Homophily emerges because players find it easier to put themselves into the shoes of a member of their own group. Endogenizing the drivers of homophily permits us to derive novel comparative statics results and to explain commonly observed features of social and economic networks.

Keywords: social and economic networks, homophily, segregation, Theory of Mind

JEL Classification: C70, C72, D01, D03, D83, D85