Homophily and Specialization in Networks

Abstract

In this paper, players contribute to two local public goods for which they have different tastes and sponsor costly links to enjoy the provision of others. In equilibrium, either there are several contributors specialized in public good provision or only two contributors who are not entirely specialized. Linking costs affect who specializes in public good provision; this implies that lowering them can decrease welfare and increase polarization. When the available budget is small, subsidies should be given to players who already specialize in public good provision; otherwise, they should target only one player who specializes in public good provision.

Keywords: Networks, Public Goods, Homophily, Polarization