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Risk Aversion and Social Networks

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Author Info

  • 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

Related research

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

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  1. Pramila Krishnan & Emanuela Sciubba, 2009. "Links and Architecture in Village Networks," Economic Journal, Royal Economic Society, vol. 119(537), pages 917-949, 04.
  2. Matthew O. Jackson & Brian W. Rogers, 2005. "The Economics of Small Worlds," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 617-627, 04/05.
  3. Marcel Fafchamps & Flore Gubert, 2007. "Risk Sharing and Network Formation," American Economic Review, American Economic Association, vol. 97(2), pages 75-79, May.
  4. Andrea Galeotti & Sanjeev Goyal, 2002. "Network Formation with Heterogeneous Players," Tinbergen Institute Discussion Papers 02-069/1, Tinbergen Institute.
  5. Stephen Leider & Markus M. Möbius & Tanya Rosenblat & Quoc-Anh Do, 2009. "Directed Altruism and Enforced Reciprocity in Social Networks," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1815-1851, November.
  6. 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.
  7. 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.
  8. Coralio Ballester & Antoni Calvó-Armengol & Yves Zenou, 2006. "Who's Who in Networks. Wanted: The Key Player," Econometrica, Econometric Society, vol. 74(5), pages 1403-1417, 09.
  9. Bryan S. Graham, 2008. "Identifying Social Interactions Through Conditional Variance Restrictions," Econometrica, Econometric Society, vol. 76(3), pages 643-660, 05.
  10. Sanjeev Goyal & Marco J. van der Leij & Jos� Luis Moraga-Gonzalez, 2006. "Economics: An Emerging Small World," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 403-432, April.
  11. Marcel Fafchamps & Marco van der Leij & Sanjeev Goyal, 2009. "Matching and network effects," Working Papers. Serie AD 2009-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  12. David A. Jaeger & Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Holger Bonin, 2010. "Direct Evidence on Risk Attitudes and Migration," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 684-689, August.
  13. 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.
  14. 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.
  15. 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).
  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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