Rachel E. Kranton

Economics and Identity

This paper considers how identity, a persons sense of self, affects economic outcomes. We incorporate the psychology and sociology of identity into an economic model of behavior. In the utility function we propose, identity is associated with different social categories and how people in these categories should behave. We then construct a simple game-theoretic model showing how identity can affect individual interactions. The paper adapts these models to gender discrimination in the workplace, the economics of poverty and social exclusion, and the household division of labor. In each case, the inclusion of identity substantively changes conclusions of previous economic analysis.

Identity and Schooling: Some Lessons for the Economics of Education

This review culls noneconomic literature on education--by sociologists, anthropologists, and practitioners to present a new economic theory of students and schools. This theory elaborates two themes that have eluded economic analysis. First is the student as decision-maker whose primary motivation is her identity. Second is a conception of the school as a social institution. This framework suggests a new perspective on questions such as resource allocation and school reform. It explains why some educational policies succeed and others fail. We show how sociological variables may affect outcomes, and suggest ways economists can incorporate them into theoretical and empirical research.

Public goods in networks

This paper considers incentives to provide goods that are non-excludable along social or geographic links. We find, first, that networks can lead to specialization in public good provision. In every social network there is an equilibrium where some individuals contribute and others free ride. In many networks, this extreme is the only outcome. Second, specialization can benefit society as a whole. This outcome arises when contributors are linked, collectively, to many agents. Finally, a new link increases access to public goods, but reduces individual incentives to contribute. Hence, overall welfare can be higher when there are holes in a network.

Strategic Interaction and Networks

This paper brings a general network analysis to a wide class of economic games. A network, or interaction matrix, tells who directly interacts with whom. A major challenge is determining how network structure shapes overall outcomes. We have a striking result. Equilibrium conditions depend on a single number: the lowest eigenvalue of a network matrix. Combining tools from potential games, optimization, and spectral graph theory, we study games with linear best replies and characterize the Nash and stable equilibria for any graph and for any impact of players’ actions. When the graph is sufficiently absorptive (as measured by this eigenvalue), there is a unique equilibrium. When it is less absorptive, stable equilibria always involve extreme play where some agents take no actions at all. This paper is the first to show the importance of this measure to social and economic outcomes, and we relate it to different network link patterns.

Risk-Sharing Networks

This paper considers the formation of risk-sharing networks. Following empirical findings, we build a model where pairs form links, but a population cannot coordinate links. As a benchmark, individuals commit to share monetary holdings equally with linked partners. We find efficient networks can (indirectly) connect all individuals and involve full insurance. But equilibrium networks connect fewer individuals. When breaking links, individuals do not consider negative externalities on others in the network. Thus identical individuals can end up in different positions in a network and have different outcomes. These results may help to explain empirical findings that risk-sharing is often asymmetric.

Networks versus Vertical Integration

We construct a theory to compare vertically integrated firms to networks of manufacturers and suppliers. Vertically integrated firms make their own specialized inputs. In networks, manufacturers procure specialized inputs from suppliers that, in turn, sell to several manufacturers. The analysis shows that networks can yield greater social welfare when manufacturers experience large idiosyncratic demand shocks. Individual firms may also have the incentive to form networks, despite the lack of long-term contracts. The analysis is supported by existing evidence and provides predictions as to the shape of different industries.

Competition for Goods in Buyer-Seller Networks

This paper studies competition in a network and how a network structure determines agents’ individual payoffs. It constructs a general model of competition that can serve as a reduced form for specific models. The paper shows how agents’ outside options, and hence their shares of surplus, derive from “opportunity paths” connecting them to direct and indirect alternative exchanges. Analyzing these paths, results show how third parties’ links affect different agents’ bargaining power. Even distant links may have large effects on agents’ earnings. These payoff results, and the identification of the paths themselves, should prove useful to further analysis of network structure.

Identity economics and the brain: uncovering the mechanisms of social conflict

Social contexts can have dramatic effects on decisions. When individuals recognize each other as coming from the same social group, they can coordinate their actions towards a common goal. Conversely, information about group differences can lead to conflicts both economic and physical. Understanding how social information shapes decision processes is now a core goal both of behavioural economics and neuroeconomics. Here, we describe the foundations for research that combines the theoretical framework from identity economics with the experimental methods of neuroscience. Research at this intersection would fill important gaps in the literature not addressed by current approaches in either of these disciplines, nor within social neuroscience, psychology or other fields. We set forth a simple taxonomy of social contexts based on the information content they provide. And, we highlight the key questions that would be addressed by a new ‘identity neuroeconomics’. Such research could serve as an important and novel link between the social and natural sciences.

Rumors and Social Networks

Why do people spread rumors? This paper studies the transmission of possibly false information---by rational agents who seek the truth. Unbiased agents earn payoffs when a collective decision is correct in that it matches the true state of the world, which is initially unknown. One agent learns the underlying state and chooses whether to send a true or false message to her friends and neighbors who then decide whether or not to transmit it further. The papers hows how a social network can serve as a filter. Agents block messages from parts of the network that contain many biased agents; the messages that circulate may be incorrect but sufficiently informative as to the correct decision.

Networks in Economics: Remarks

The past fifteen years has seen a burst in research on the economics of networks. Researchers have been studying a wide range of economic settings, and in each case, links between individuals arguably play critical roles in individual and aggregate outcomes. The following are some examples, with specified settings and links: peer effects with friendship links, innovation/research and development with links between researchers and colleagues, local public goods with geographic and social links, oligopoly and firms’ interlinked markets, macroeconomic shocks and supply chain links, information transmission and people’s social links, banking and links due to crossholdings, and markets and links between buyers and sellers. The mathematical structure of networks ties together all this research. In a network, agents have pairwise “links” that affect their dealings. These links collectively give the “adjacency matrix,” also called the “graph,” or the “network,” that impacts outcomes for all agents. At the individual level, an agent’s payoffs depend directly on the actions of her “neighbors,” i.e., the agents to whom she is linked. Distant agents also shape payoffs and incentives to the extent they are indirectly linked, by “paths” in the network. These remarks give a bird’s eye of this research, providing a road map to bring together the detailed accounts of the empirical and theoretical research provided by the two papers in this session. Following the road map, these remarks give a whirlwind tour of research objectives and themes and present challenges for future studies. Research papers in this area typically begin with documenting an economic outcome of interest and recognizing that a network. underlies this outcome. Figure 1 gives a road map. Starting at the top, a theoretical study typically posits pairwise links between N agents that form a network G. An empirical study will also typically begin with data on the links that make up the network, i.e., who is linked to whom in the relevant population. There are then two black boxes to be filled in. The first box concerns how networks shape outcomes, i.e., the theory and empirics of how individual actions, given a network, lead to the economic outcome. The second black box concerns network formation, i.e., how links come about in the first place.