Social Interactions and Spillovers

40 Pages Posted: 6 Dec 2010

See all articles by Antonio Cabrales

Antonio Cabrales

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Antoni Calvó-Armengol

Autonomous University of Barcelona; Centre de Recherche en Économie Appliquée (CREA)

Yves Zenou

Monash University - Department of Economics; Stockholm University; Research Institute of Industrial Economics (IUI); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 2010

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: network formation, peer effects, welfare

JEL Classification: L22, L51, O31, O38

Suggested Citation

Cabrales, Antonio and Calvó-Armengol, Antoni and Zenou, Yves, Social Interactions and Spillovers (December 2010). CEPR Discussion Paper No. DP8127. Available at SSRN: https://ssrn.com/abstract=1718922

Antonio Cabrales

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 65 (Phone)
(34-93) 542 17 46 (Fax)

Antoni Calvó-Armengol

Autonomous University of Barcelona

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

Centre de Recherche en Économie Appliquée (CREA)

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Yves Zenou

Monash University - Department of Economics ( email )

Australia

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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