Dynamics of Information Exchange in Endogenous Social Networks

50 Pages Posted: 25 Sep 2010

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Kostas Bimpikis

Stanford Graduate School of Business

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science

Multiple version iconThere are 2 versions of this paper

Date Written: September 23, 2010

Abstract

We develop a model of information exchange through communication and investigate its implications for information aggregation in large societies. An underlying state determines payoffs from different actions. Agents decide which others to form a costly communication link with incurring the associated cost. After receiving a private signal correlated with the underlying state, they exchange information over the induced communication network until taking an (irreversible) action. We define asymptotic learning as the fraction of agents taking the correct action converging to one in probability as a society grows large. Under truthful communication, we show that asymptotic learning occurs if (and under some additional conditions, also only if) in the induced communication network most agents are a short distance away from “information hubs,” which receive and distribute a large amount of information. Asymptotic learning therefore requires information to be aggregated in the hands of a few agents. We also show that while truthful communication may not always be a best response, it is an equilibrium when the communication network induces asymptotic learning. Moreover, we contrast equilibrium behavior with a socially optimal strategy profile, i.e., a profile that maximizes aggregate welfare. We show that when the network induces asymptotic learning, equilibrium behavior leads to maximum aggregate welfare, but this may not be the case when asymptotic learning does not occur. We then provide a systematic investigation of what types of cost structures and associated social cliques (consisting of groups of individuals inked to each other at zero cost, such as friendship networks) ensure the emergence of communication networks that lead to asymptotic learning. Our result shows that societies with 599 many and sufficiently large social cliques do not induce asymptotic learning, because each social clique would have sufficient information by itself, making communication with others relatively unattractive. Asymptotic learning results if social cliques are neither too numerous nor too large, in which communication across cliques is encouraged.

Keywords: communication, learning, network formation, social networks

JEL Classification: D83, D85

Suggested Citation

Acemoglu, Daron and Bimpikis, Kostas and Ozdaglar, Asuman E., Dynamics of Information Exchange in Endogenous Social Networks (September 23, 2010). MIT Department of Economics Working Paper No. 10-13. Available at SSRN: https://ssrn.com/abstract=1682243 or http://dx.doi.org/10.2139/ssrn.1682243

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Kostas Bimpikis

Stanford Graduate School of Business ( email )

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Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science ( email )

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