Inequality's Economic and Social Roots: The Role of Social Networks and Homophily

Abstract

I discuss economic and social sources of inequality and elaborate on the role of social networks in inequality, economic immobility, and economic inefficiencies. The lens of social networks clarifies how the entanglement of people's information, opportunities, and behaviors with those of their peers and communities leads to persistent differences in outcomes across groups in education, employment, health, income and wealth. The key role of homophily in dividing groups within the network is highlighted. A network perspective's policy implications differ substantially from a strictly economic perspective. I discuss the importance of ``policy cocktails'' that include aspects that are aimed at both the economic and social forces driving inequality.

Keywords: Inequality, Mobility, Immobility, Economic Mobility, Social Networks, Homophily, Social Capital, Job Referrals, Poverty Traps, Job Contacts, Discrimination, Social Norms, Networks, Complementarities, Affirmative Action, Peer Effects, Redistribution

JEL Classification: D85, D13, D63, D78, L14, O12, Z13