We consider a world in which individuals have private endowments and trade in markets, while their utility is sensitive to the consumption of their neighbors. Our interest is in understanding how social structure of comparisons, taken together with the familiar fundamentals of the economy -endowments, technology and preferences -shapes equilibrium prices, allocations and welfare.We find that equilibrium prices and allocations depend on average individual centrality in the social network. As we add links to a social network, the centralities rise and this pushes up prices of the socially sensitive good. Newly linked agents demand more of the socially sensitive good, while the reverse happens with regard to the standard good. We derive a formula to compute the critical link, i.e., the new link which maximizes price increase.We then turn to a model with heterogenous endowments, and find that inequality in network centrality and in wealth inequality reinforce each other. Thus a transfer of resources from less to more central agents raises prices of the socially sensitive good and alters allocations and utilities of all agents. We show by example that poor individuals lose utility while rich individuals gain utility as society moves from segregation to integration.
In this paper we propose a mechanism generating innovations with productivity distributed according to a power law. We assume that knowledge creation occurs as new ideas are produced from combinations of existing ideas. The productivity of an innovation is determined by an unobservable intrinsic component as well as by the productivity of the parent ideas and their parents, thus generating a network of spillovers. The second important feature is that the innovator has no global information on the network of parenthood links across ideas but has access to local knowledge, as for example the list of cited references in a patent. The optimal behavior of the innovator is to "walk randomly" through the network of "citations" as this algorithm leads to selecting highly connected parent nodes. We show that the distribution of productivity resulting from this optimal behaviour follows a power law. The intuition behind the result is that the innovator focuses his efforts on strengthening local spilovers because he has no command on the other sources of productivity. When this process of innovation is embedded in a model a la Kortum (1997) balanced growth of output is generated.
Some recent research indicates that the occurrence of indeterminacy in models with externalities may be overstated because these models ignore agents' heterogeneity. We consider a neoclassical two-sector growth model with technological externalities. Agents are heterogeneous with respect to their shares of the initial stock of capital and in labor endowments. We find that the sign of the effect of inequality on indeterminacy is not pinned down by the standard properties of preferences. However, when the inverse of absolute risk aversion is a convex (respectively concave) function, homogeneity (heterogeneity) tends to neutralize the external effects and eliminate indeterminacy. * Manuscript
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