Sorting in Networks: Adversity and Structure

TL;DR

This paper examines how agents form and cut social and economic ties based on similarity, analyzing conditions for optimal and suboptimal sorting, and exploring how network structure and policies influence these patterns.

Contribution

It provides new conditions for sorting in networks with and without spillovers, and analyzes the implications for social stability and policy interventions.

Findings

Sorting can be suboptimal yet stable in networks.

Higher-value agents tend to be more central in the network.

Sorting patterns are limited by network and spillover conditions.

Abstract

People choose friendships with people similar to themselves, i.e. they sort by resemblence. Economic studies have shown when sorting is optimal and constitute an equilibrium, however, this presumes lack of beneficial spillovers. We investigate formation of economic and social networks where agents may form or cut ties. We combine a setup with link formation where agents have types that determine the value of a connection. We provide conditions for sorting in friendships, i.e. that agents tend to partner only with those with those sufficiently similar to themselves. Conditions are provided with and without beneficial spillovers from indirect connections. We show that sorting may be suboptimal, yet a socially stable outcome, despite otherwise obeying the conditions for sorting in Becker (1973). We analyze policy tools to mitigate suboptimal sorting. Another feature is that agents with higher value are more central in networks under certain conditions; a side effect is sorting by degree centrality under certain conditions. Finally we illustrate the limits to patterns of sorting and centrality.