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Keeping Up with the Neighbors: Social Interaction in a Market Economy

  • Christian Ghiglino
  • Sanjeev Goyal

We consider a world in which individuals have private endowments and trade in markets while their utility is negatively affected by the consumption of their neighbors. Our interest is in understanding how the social structure of comparisons, taken together with the familiar fundamentals of the economy (endowments, technology, and preferences), shapes equilibrium prices, allocations, and welfare. We show that equilibrium prices and consumption are a function of a single network statistic: centrality. An individual's "centrality" is given by the weighted sum of paths of different lengths to all others in a social network. In particular, prices are proportional to the sum of centralities, and an individual's consumption depends on how central she is relative to others in the network. Inequalities in wealth and connections reinforce each other in markets: A transfer of resources from less to more central agents raises prices. As segregated communities become integrated, the poor lose while the rich gain in utility! (JEL: D5, D6, D85) (c) 2010 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 8 (2010)
Issue (Month): 1 (03)
Pages: 90-119

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Handle: RePEc:tpr:jeurec:v:8:y:2010:i:1:p:90-119
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  1. 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.
  2. Sanjeev Goyal, 2007. "Introduction to Connections: An Introduction to the Economics of Networks
    [Connections: An Introduction to the Economics of Networks]
    ," Introductory Chapters, Princeton University Press.
  3. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series rwp04-029, Harvard University, John F. Kennedy School of Government.
  4. David G. Blanchflower & Andrew J. Oswald, 2000. "Well-Being Over Time in Britain and the USA," NBER Working Papers 7487, National Bureau of Economic Research, Inc.
  5. Ed Hopkins & Tatiana Kornienko, 2002. "Running to Keep in the Same Place: Consumer Choice as a Game of Status," ESE Discussion Papers 92, Edinburgh School of Economics, University of Edinburgh.
  6. Tan, Hi-Lin, 2006. "Prices in Networks," MPRA Paper 62984, University Library of Munich, Germany.
  7. Dilip Mookherjee & Stefan Napel & Debraj Ray, 2008. "Aspirations, Segregation and Occupational Choice," Working Papers id:1710, eSocialSciences.
  8. Cres, Herve & Ghiglino, Christian & Tvede, Mich, 1997. "Externalities, Internalization and Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 465-77, May.
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