Social Networks and Interdependent Utilities: Peer Effects, Efficiency and Distributional Conflicts∗

We present a model where agents are embedded in a network of social relations and experience interdependent utilities: each agent total utility depends on his private utility, but also on the total utilities of the agents with which he is linked. We study the peer effects, meaning global and local externalities, that are generated by these interdependencies, obtaining closed form expressions for any generic situation that rely crucially on the network structure. Next, we study which are the efficient allocations in this setting. We characterize two polar situations: when the Pareto frontier is degenerated (there is a unique efficient allocation), and when the Pareto frontier is regular (all the allocations that exhaust resources are efficient). This characterization is done by means of a sociological concept, prestige, that measures the prominence of an agent derived from his position in the network. Finally, we study ditributional conflicts with interdependent utilities describing how the network structure affects the Nash bargaining solution