Exploring Impact: Negative Effects of Social Networks

The sociological literature on social networks emphasizes by and large positive network effects. Negative effects of such networks are discussed rather rarely. This paper tackles negative effects by applying economic theory, particularly neoclassical theory, new institutional theory and the results from experimental economics to the concept of social networks. In the paper it is assumed that social networks are exclusive and since exclusiveness affects the allocation of resources, negative external effects may occur. The argument of the paper is that it is not only advantages for network members that need to be investigated but also the disadvantages for non-network members. The results have two implications. The first one is for economic policy, which often fosters social networking while ignoring their negative externalities. The second one is for network research that can benefit from a more rigorous application of economic theories.