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Dürnecker, Georg; Vega-Redondo, Fernando (2018): Social Networks and the Process of Globalization. In: Review of Economic Studies, Vol. 85, No. 3: pp. 1716-1751
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Abstract

We propose a stylized dynamic model to understand the role of social networks in the phenomenon we call "globalization". In a nutshell, this term refers to the process by which even agents who are geographically far apart come to interact, thus being able to overcome what would otherwise be a fast saturation of local opportunities. Akey feature of our model is that the social network is the main channel through which agents exploit new opportunities. Therefore, only if the social network becomes global (heuristically, it "reaches far in few steps") can global interaction be steadily sustained. An important insight derived from the model is that, for the social network to turn global, the long-range links required (bridges) cannot endogenously arise unless the matching mechanism displays significant local structure (cohesion). This sheds novel light on the dichotomy between bridging and cohesion that has long played a prominent role in the socio-economic literature. Our analysis also relates the process of globalization to other features of the environment such as the quality of institutions or the arrival rate of fresh ideas. The model is partially studied analytically for a limit scenario with a continuum population and is fully solved numerically for finite-population contexts.