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Keeping up with the neighbours: 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 sensitive to the consumption of their neighbors. Our interest is in understanding how social structure of comparisons, taken together with the familiar fundamentals of the economy � endowments, technology and preferences � shapes equilibrium prices, allocations and welfare. We find that equilibrium prices and allocations depend on average individual centrality in the social network. As we add links to a social network, the centralities rise and this pushes up prices of the socially sensitive good. Newly linked agents demand more of the socially sensitive good, while the reverse happens with regard to the standard good. We derive a formula to compute the critical link, i.e., the new link which maximizes price increase. We then turn to a model with heterogenous endowments, and find that inequality in network centrality and in wealth inequality reinforce each other. Thus a transfer of resources from less to more central agents raises prices of the socially sensitive good and alters allocations and utilities of all agents. We show by example that poor individuals lose utility while rich individuals gain utility as society moves from segregation to integration.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 655.

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Date of creation: 30 Jun 2008
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Handle: RePEc:esx:essedp:655
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