Network formation with value heterogeneity: centrality, segregation and adverse effects

We investigate formation of economic and social networks where agents may form or cut ties. The novelty is combining a setup where agents are heterogeneous in their talent for generating value in the links they form and value may also accrue from indirect ties. We provide sufficient conditions for assortative matching: agents of greater talent have partners of greater talent. A novel feature is that agents with higher talent are more central in networks. Another novel feature is degree assortativity: partnered agents have a similar number of partners. Two suboptimal network structures are noteworthy. One network displays excess assortativity as high and low talented types fail to connect, and thus inefficient due to payoff externalities despite otherwise obeying the conditions of Becker (1973). In another suboptimal network an agent of low talent becomes excessively central.