Sorting in Networks: Adversity and Structure (1503.07389v5)

Abstract: People choose friendships with people similar to themselves, i.e. they sort by resemblence. Economic studies have shown when sorting is optimal and constitute an equilibrium, however, this presumes lack of beneficial spillovers. We investigate formation of economic and social networks where agents may form or cut ties. We combine a setup with link formation where agents have types that determine the value of a connection. We provide conditions for sorting in friendships, i.e. that agents tend to partner only with those with those sufficiently similar to themselves. Conditions are provided with and without beneficial spillovers from indirect connections. We show that sorting may be suboptimal, yet a socially stable outcome, despite otherwise obeying the conditions for sorting in Becker (1973). We analyze policy tools to mitigate suboptimal sorting. Another feature is that agents with higher value are more central in networks under certain conditions; a side effect is sorting by degree centrality under certain conditions. Finally we illustrate the limits to patterns of sorting and centrality.