Risk Aversion and Social Networks

Kovářík Jaromír and Marco van der Leij
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Kovářík Jaromír: Dpto. Fundamentos del Análisis Económico I & Bridge, University of the Basque Country, Av. Lehendakari Aguirre 83, 48015 Bilbao, Spain CERGE-EI, a joint workplace of Charles University in Prague and the Economics Institute of the Academy of Sciences of the Czech Republic, Politických vězńů 7, 111 21 Prague, Czech Republic

Review of Network Economics, 2014, vol. 13, issue 2, 121-155

Abstract: This paper first investigates empirically the relationship between risk aversion and social network structure in a large group of undergraduate students. We find that risk aversion is strongly correlated to local network clustering, that is, the probability that one has a social tie to friends of friends. We then propose a network formation model that generates this empirical finding, suggesting that locally superior information on benefits makes it more attractive for risk averse individuals to link to friends of friends. Finally, we discuss implications of this model. The model generates a positive correlation between local network clustering and benefits, even if benefits are distributed independently ex ante. This provides an alternative explanation of this relationship to the one given by the social capital literature. We also establish a linkage between the uncertainty of the environment and the network structure: risky environments generate more clustered and more unequal networks in terms of connectivity.

Keywords: clustering coefficient; degree distribution; local/global search; Network formation; risk aversion; uncertainty/riskiness (search for similar items in EconPapers)
JEL-codes: D81 D85 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Risk aversion and social networks (2012)
Working Paper: Risk Aversion and Social Networks (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:rneart:v:13:y:2014:i:2:p:121-155:n:1004

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DOI: 10.1515/rne-2014-0029

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