Effort and synergies in network formation

Abstract

The aim of this paper is to understand the interactions between productive effort and the creation of synergies that are the sources of technological collaboration agreements, agglomeration, social stratification, etc. We model this interaction in a way that allows us to characterize how agents devote resources to both activities. This permits a fullfledged equilibrium/welfare analysis of network formation with endogenous investment efforts and to derive unambiguous comparative statics results. In spite of its parsimony that ensures tractability, the model retains enough richness to replicate a (relatively) broad range of empirical regularities displayed by social and economic networks, and is directly estimable to recover is structural parameters.