We study a dynamic model of opinion formation in social networks. In our model, boundedly rational agents update opinions by averaging over their neighbors' expressed opinions, but may misrepresent their own opinion by conforming or counter-conforming with their neighbors. We show that an agent's social influence on the long-run group opinion is increasing in network centrality and decreasing in conformity. For efficiency of information aggregation ("wisdom"), misrepresentation of opinions need not undermine wisdom. Given the network, we provide the optimal distribution of conformity levels in the society and show which agents should be more conforming in order to increase wisdom.

We consider an OLG model (of a socialization process) where continuous traits are transmitted from an adult generation to the children. A weighted social network describes how children are influenced not only by their parents but also by other role models within the society. Parents can invest into the purposeful socialization of their children by strategically displaying a cultural trait (which need not coincide with their true trait). Based on Nash equilibrium behavior, we study the dynamics of cultural traits throughout generations. We provide conditions on the network structure that are sufficient for long-run convergence to a society with homogeneous subgroups. In the special case of quadratic utility, the condition is that each child is more intensely shaped by its parents than by the social environment. Our model also represents an extension of the classical DeGroot model of opinion formation for which we introduce strategic interaction in choice of expressed opinions (in our setup: traits). We show that under strategic interaction convergence is slower and for convergence we need more restrictive necessary and sufficient conditions than in the DeGroot model.

Since the seminal contribution of Jackson and Wolinsky (J Econ Theory 71(1): 1996) it has been widely acknowledged that the formation of social networks exhibits a general conflict between individual strategic behavior and collective outcome. What has not been studied systematically are the sources of inefficiency. We approach this omission by analyzing the role of positive and negative externalities of link formation. This yields general results that relate situations of positive externalities with stable networks that cannot be "too dense" in a well-defined sense, while situations with negative externalities tend to induce "too dense" networks. Those results are neither restricted to specific assumptions on the agents' preferences (e.g. homogeneity), nor to a specific notion of stability or efficiency.

JEL classification: C72 D83 D85 Z13 Keywords: Opinion leadership Wisdom of crowds Consensus Social networks Conformity Eigenvector centrality a b s t r a c tWe study a dynamic model of opinion formation in social networks. In our model, boundedly rational agents update opinions by averaging over their neighbors' expressed opinions, but may misrepresent their own opinion by conforming or counter-conforming with their neighbors. We show that an agent's social influence on the long-run group opinion is increasing in network centrality and decreasing in conformity. Concerning efficiency of information aggregation or "wisdom" of the society, it turns out that misrepresentation of opinions need not undermine wisdom, but may even enhance it. Given the network, we provide the optimal distribution of conformity levels in the society and show which agents should be more conforming in order to increase wisdom.

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