Keeping up with the neighbours: social interaction in a market economyChristian Ghiglino () and Sanjeev Goyal () Economics Discussion Papers from University of Essex, Department of Economics Abstract: 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. New Economics Papers: this item is included in nep-net, nep-pke, nep-soc and nep-ure Downloads: (external link) Related works: Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Economics Discussion Papers from University of Essex, Department of Economics |
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