We study learning in a setting where agents receive independent noisy signals about the true value of a variable and then communicate in a network. They naïvely update beliefs by repeatedly taking weighted averages of neighbors' opinions. We show that all opinions in a large society converge to the truth if and only if the influence of the most influential agent vanishes as the society grows. We also identify obstructions to this, including prominent groups, and provide structural conditions on the network ensuring efficient learning. Whether agents converge to the truth is unrelated to how quickly consensus is approached. (JEL D83, D85, Z13)
Abstract. We examine how participation in a microfinance program diffuses through social networks, using detailed demographic, social network, and participation data from 43 villages in South India. We exploit exogenous variation in the importance (in a network sense) of the people who were first informed about the program, the "injection points." Microfinance participation is significantly higher when the injection points have higher eigenvector centrality. We also estimate structural models of diffusion that allow us to (i) determine the relative roles of basic information transmission versus other forms of peer influence, and (ii) distinguish information passing by participants and nonparticipants. We find that participants are significantly more likely to pass information on to friends and acquaintances than informed non-participants. However, information passing by non-participants is still substantial and significant, accounting for roughly one-third of informedness and participation. We also find that, once we have properly conditioned on an individual being informed, her decision to participate is not significantly affected by the participation of her acquaintances.JEL Classification Codes: D85, D13, G21, L14, O12, O16, Z13
We present a dynamic model of network formation where nodes find other nodes with whom to form links in two ways: some are found uniformly at random, while others are found by searching locally through the current structure of the network (e.g., meeting friends of friends). This combination of meeting processes results in a spectrum of features exhibited by large social networks, including the presence of more high- and low-degree nodes than when links are formed independently at random, having low distances between nodes in the network, and having high clustering of links on a local level. We fit the model to data from six networks and impute the relative ratio of random to network-based meetings in link formation, which turns out to vary dramatically across applications. We show that as the random/network-based meeting ratio varies, the resulting degree distributions can be ordered in the sense of stochastic dominance, which allows us to infer how the formation process affects average utility in the network. (JEL D85, Z13)
Globalization brings with it increased financial interdependencies among many kinds of organizations-governments, central banks, investment banks, firms, etc.-that hold each other's shares, debts, and other obligations. Such interdependencies can lead to cascading defaults and failures, which are often avoided through massive bailouts of institutions deemed "too big to fail." Recent examples include the US government's interventions in AIG, Fannie Mae, Freddie Mac, and General Motors; and the European Commission's interventions in Greece and Spain. Although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries, they emphasize the need to study the risks created by a network of interdependencies. Understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent.In this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies. Organizations' values depend on each other-e.g., through cross-holdings of shares, debt, or other liabilities. If an
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