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Dynamics of Information Exchange in Endogenous Social Networks

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  • Daron Acemoglu
  • Kostas Bimpikis
  • Asuman E, Ozdaglar

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 linked 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 too many and sufficiently large social cliques do not induce asymptotic learning, because each social clique would have sufficient information by itself, making communicatio

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 661465000000000216.

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Date of creation: 08 Oct 2010
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Handle: RePEc:cla:levarc:661465000000000216

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  1. Galeotti, Andrea & Goyal, Sanjeev & Kamphorst, Jurjen, 2006. "Network formation with heterogeneous players," Games and Economic Behavior, Elsevier, vol. 54(2), pages 353-372, February.
  2. Jeanne Hagenbach & Frédéric Koessler, 2008. "Strategic communication networks," PSE Working Papers halshs-00586847, HAL.
  3. David A. Reinstein & Christopher M. Snyder, 2005. "THE INFLUENCE OF EXPERT REVIEWS ON CONSUMER DEMAND FOR EXPERIENCE GOODS: A CASE STUDY OF MOVIE CRITICS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 27-51, 03.
  4. Andrea Galeotti & Christian Ghiglino & Francesco Squintani, 2009. "Strategic Information Transmission in Networks," Economics Discussion Papers 668, University of Essex, Department of Economics.
  5. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, . "Information Percolation with Equilibrium Search Dynamics," Swiss Finance Institute Research Paper Series 09-02, Swiss Finance Institute.
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  7. Oriana Bandiera & Imran Rasul, 2006. "Social Networks and Technology Adoption in Northern Mozambique," Economic Journal, Royal Economic Society, vol. 116(514), pages 869-902, October.
  8. Smith, L, 1996. "Social Learning in a Changing World," Working papers 96-34, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Ambrus, Attila & Azevedo, Eduardo M. & Kamada, Yuichiro, 2013. "Hierarchical cheap talk," Theoretical Economics, Econometric Society, vol. 8(1), January.
  10. Andrea Galeotti, 2004. "One-way Flow Networks: the Role of Heterogeneity," Tinbergen Institute Discussion Papers 04-031/1, Tinbergen Institute.
  11. Nair, Harikesh S. & Manchanda, Puneet & Bhatia, Tulikaa, 2006. "Asymmetric Peer Effects in Physician Prescription Behavior: The Role of Opinion Leaders," Research Papers 1970, Stanford University, Graduate School of Business.
  12. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
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Cited by:
  1. Bar Ifrach & Costis Maglaras & Marco Scarsini, 2011. "Monopoly Pricing in the Presence of Social Learning," Working Papers 11-11, NET Institute, revised Nov 2011.
  2. Daniel Andrei & Bruce Carlin & Michael Hasler, 2014. "Model Disagreement and Economic Outlook," NBER Working Papers 20190, National Bureau of Economic Research, Inc.
  3. Garcia, Daniel, 2012. "Communication and Information Acquisition in Networks," MPRA Paper 55481, University Library of Munich, Germany, revised 24 Apr 2014.
  4. Pietro Battiston & Luca Stanca, 2014. "Boundedly Rational Opinion Dynamics in Directed Social Networks: Theory and Experimental Evidence," Working Papers 267, University of Milano-Bicocca, Department of Economics, revised Jan 2014.
  5. Carlos Lever Guzmán, 2010. "Strategic Spending in Voting Competitions with Social Networks," Working Papers 2010-16, Banco de México.

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