Emergence of Homophily under Contextual Mechanisms

Jiaxing Weng, Haijun Yang and Tongyu Wang

Papers from arXiv.org

Abstract: This paper introduces a tractable model to study incentive-compatible homophily under both external environments--such as exogenous shocks or policy constraints--and internal micromotives based on interactive attributes. We propose a set of invariants that capture main features of homophily and the well-defined partition dynamics leading to perfect global homophily. The criteria for homophily formation are characterized via isomorphism. Within this framework, we demonstrate the emergence of macro-complementarity coupled with micro-substitution, where local individuals' utility function is nonlinear and submodular. We discuss two types of financial networks and their differences: hierarchical structure emerges from short-term liquidity transactions, whereas core-periphery structure is based on a stock-based perspective.

Date: 2025-10
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2510.09821

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