Network Formation and Cooperation

In this paper we adopt Granovetter's view expressed in his famous article ''Economic Action and Social Structure: The Problem of Embeddedness'' , where he argues that the concept of man in economics is extremely undersocialized because it ignores the importance of social networks. In so doing the incentives to mutual cooperation in social matching games in which the social network is endogenously determined are studied. The main result shows that in atomized societies where there is no information flows between different pairs of individuals and the rest of the society, individuals choose either to form the maximal number of links possible or to form no links. Whereas in embedded societies where information transmission is allowed, the type of social networks that arise take different architectures some of them symmetric and some of the asymmetric. This allows us to improve our understanding of a wide variety of phenomena as occupational mobility, informal credit markets in rural areas, cooperative formation, social capital, segmented labor markets, international trade and so on. In partricular, the model results are used to explain the concept of social capital , its benefits and costs