Gagnon, J. and Goyal, S.

Social Structure, Markets and Inequality

CWPE1549

Abstract: The interaction between social structure and markets remains a central theme in the social sciences. In some instances, markets can build on and enhance social networks' economic role; in other contexts, markets appear to be in direct competition with social networks. The impact of markets on inequality and welfare is also varying: while markets can sometimes offer valuable outside options to marginalised individuals, in other situations only well connected and better off individuals can benefit from them. In this paper, our goal is to understand the economic mechanisms that can explain these different empirical patterns. We develop a simple model that combines social networks and a mix of network-exchange and market-exchange activities. The key to understanding the empirical patterns and phenomena lies in the relation between the two activities i.e., whether they are (strategic) complements or substitutes. Social connectedness facilitates the adoption of the market action if the two activities are complements; the converse is true in case of substitutes. Inequality in a social structure is typically reinforced by the market in case the two actions are complements; the converse holds true if they are substitutes.

Keywords: Networks, substitutes and complements, Welfare.

JEL Codes: D62 D63 L14 O17

Author links: Sanjeev Goyal

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1549.pdf