Three Essays on Social Networks

In three chapters I study the formation of social networks, and the impact the structures that arise may have in various economic settings. First, I develop a model of social network formation with heterogeneous agents and incomplete information. The model predicts an equilibrium in which agents sort themselves into ``insiders'' and ``outsiders.'' Insiders form many links to one another, and form a dense core structure in the network, while outsiders coordinate their links by connecting to an insider, and form a sparse periphery . Networks form stochastically, contingent on the private values of each agent, and include more realistic structures than networks arising among homogenous agents. I characterize the set of equilibria and identify its extremes, which have a natural interpretation as public good provision. One extreme, when agents are all insiders, is equivalent to the provision of a pure public good, and suffers from free-riding. The other extreme, when every agent but one is an outsider, the equilibrium is equivalent to the provision of an excludable public good, and suffers from coordination problems. I next develop expand this model to study the provision local public goods, such as information, that is shared along the network. Individuals may choose to provide a public good that is not excludable among their peers in a social network. The network is formed endogenously, as agents non-cooperatively choose their social ties. I characterize the set of equilibria, and examine the relationship between public good provision and social network formation. I find that the architecture of the social network determines the strategic interaction between link formation and public good provision; for some networks, links are strategic substitutes, so that agents attempt to free-ride on their peer's links. This leads to higher levels of public good provision, and specialization in roles: Agents either invest in the public good or form links, but not both. For other networks, however, links are strategic complements, so that agents coordinate their links by connecting to central agents. This leads to lower levels of public good provision, and less specialization; some agents will both link and invest, leading to lower welfare. Finally I present a model of time allocation between formal and informal labor supply where workers learn of informal job opportunities from their peers in a social network. In addition to formal income taxation and enforcement, individuals??? labor supply decisions depend on the number of their peers with informal jobs and the strength of social ties. Workers allocate more time to informal activities when tax enforcement is lax and job information transmission is good. More connected social networks (e.g. wheel, complete) feature lower average income but higher average utility than poorly connected social networks (e.g. star, empty). Average income may be non-monotonic in tax enforcement