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Risk Aversion and Social Networks

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  • Jaromir Kovarik

    ()
    (University of the Basque Country)

  • Marco J. van der Leij

    ()
    (University of Amsterdam)

Abstract

Agents involved in the formation of a social or economic network typically face uncertainty about the benefits of creating a link. However, the interplay of such uncertainty and risk attitudes has been neglected in the network formation literature. We propose a dynamic network formation model that builds on standard microeconomic concepts of utility maximization, incomplete information, and risk aversion. The model predicts that an agent's risk aversion is correlated with her network clustering coefficients, but not with her degree. We discover a mechanism that generates a correlation between network position and payoffs of individuals. Moreover, we show how the generated network architecture depends on the uncertainty in the environment it is embedded in.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-072/1.

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Date of creation: 21 Apr 2011
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Handle: RePEc:dgr:uvatin:20110072

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Web page: http://www.tinbergen.nl

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Keywords: Network formation; risk aversion; clustering coefficient; local/global search;

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  1. Sanjeev Goyal & Marcel Fafchamps & Marco J. van der Leij, 2006. "Matching and Network Effects," Economics Discussion Papers 611, University of Essex, Department of Economics.
  2. Jackson, Matthew O. & Rogers, Brian W., 2005. "The economics of small worlds," Working Papers 1214, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Sanjeev Goyal & Marco van der Leij & José Luis Moraga-Gonzàlez, 2004. "Economics: An Emerging Small World?," Working Papers 2004.84, Fondazione Eni Enrico Mattei.
  4. Jaeger, David A. & Dohmen, Thomas J. & Falk, Armin & Huffman, David & Sunde, Uwe & Bonin, Holger, 2010. "Direct evidence on risk attitudes and migration," Munich Reprints in Economics 19528, University of Munich, Department of Economics.
  5. Pramila Krishnan & Emanuela Sciubba, 2006. "Links and Architecture in Village Networks," Birkbeck Working Papers in Economics and Finance 0614, Birkbeck, Department of Economics, Mathematics & Statistics.
  6. Coralio Ballester & Antoni Calvo-Armengol & Yves Zenou, 2005. "Who's Who in Networks. Wanted: the Key Player," NajEcon Working Paper Reviews 666156000000000586, www.najecon.org.
  7. Rosenblat, Tanya & Mobius, Markus, 2009. "Directed Altruism and Enforced Reciprocity in Social Networks," Staff General Research Papers 13025, Iowa State University, Department of Economics.
  8. De Weerdt, Joachim, 2002. "Risk-Sharing and Endogenous Network Formation," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  9. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-18, December.
  10. Bryan S. Graham, 2008. "Identifying Social Interactions Through Conditional Variance Restrictions," Econometrica, Econometric Society, vol. 76(3), pages 643-660, 05.
  11. Andrea Galeotti & Sanjeev Goyal & Jurjen Kamphorst, 2003. "Network Formation with Heterogeneous Players," Economics Discussion Papers 562, University of Essex, Department of Economics.
  12. Yann Bramoulle & Brian Rogers, 2009. "Diversity and Popularity in Social Networks," Discussion Papers 1475, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Marcel Fafchamps & Flore Gubert, 2007. "Risk Sharing and Network Formation," American Economic Review, American Economic Association, vol. 97(2), pages 75-79, May.
  14. Matthew O. Jackson & Brian W. Rogers, 2007. "Meeting Strangers and Friends of Friends: How Random Are Social Networks?," American Economic Review, American Economic Association, vol. 97(3), pages 890-915, June.
  15. Jan Eeckhout & Kaivan Munshi, 2010. "Matching in Informal Financial Institutions," Journal of the European Economic Association, MIT Press, vol. 8(5), pages 947-988, 09.
  16. David, Cesarini & Dawes, Christopher T. & Johannesson, Magnus & Lichtenstein, Paul & Wallace, Björn, 2007. "Genetic Variation in Preferences for Giving and Risk-Taking," Working Paper Series in Economics and Finance 679, Stockholm School of Economics, revised 12 Jan 2009.
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