Keeping Up with the Neighbors: Social Interaction in a Market Economy

We consider a world in which individuals have private endowments and trade in markets while their utility is negatively affected by the consumption of their neighbors. Our interest is in understanding how the social structure of comparisons, taken together with the familiar fundamentals of the economy (endowments, technology, and preferences), shapes equilibrium prices, allocations, and welfare. We show that equilibrium prices and consumption are a function of a single network statistic: centrality. An individual's "centrality" is given by the weighted sum of paths of different lengths to all others in a social network. In particular, prices are proportional to the sum of centralities, and an individual's consumption depends on how central she is relative to others in the network. Inequalities in wealth and connections reinforce each other in markets: A transfer of resources from less to more central agents raises prices. As segregated communities become integrated, the poor lose while the rich gain in utility! (JEL: D5, D6, D85) (c) 2010 by the European Economic Association.