91 Pages Posted: 3 Jun 2015 Last revised: 31 Aug 2017
Date Written: August 30, 2017
We study how networks of informational flows are formed when agents acquire information through peers. We develop an endogenous network formation model, in which agents care not only about accuracy of their decision making but also about the actions other agents will take. We show that any strict equilibrium information structure is a hierarchical network. In addition, if the marginal cost of forming links is weakly increasing, the equilibrium network is core-periphery. Even if agents are ex-ante identical, the equilibrium information structure generates ex-post heterogeneity in payoffs and actions. In any equilibrium, agents are sorted into layers of influence. Some individuals endogenously become opinion makers and have pervasive influence over the society, although they may not have superior information. Finally, we study how individual characteristics determine agents' role in the network.
Keywords: Network Formation, Information Acquisition, Coordination
JEL Classification: D83, D85
Suggested Citation: Suggested Citation