Preferences, Homophily, and Social Learning
We study a model of social learning in networks where agents have heterogeneous preferences, and neighbors tend to have similar preferences---a phenomenon known as homophily. Using this model, we resolve a puzzle in the literature: theoretical models predict that preference diversity helps learning, and homophily slows learning, while empirical work suggests the opposite. We find that the density of network connections determines the impact of preference diversity and homophily on learning. When connections are sparse, diverse preferences are harmful to learning, and homophily may lead to substantial improvements. In a dense network, preference diversity is beneficial. The conflicting findings in prior work result from a focus on networks with different densities; theory has focused on dense networks, while empirical papers have studied sparse networks. Our results suggest that in complex networks containing both sparse and dense components, diverse preferences and homophily play complementary, beneficial roles.
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