DP7566 | Ethnic Identity and Social Distance in Friendship Formation

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We analyze a model of network formation with agents that belong to different communities and an endogenous cost structure. Both individual benefits and costs depend on direct as well as indirect connections. Benefits of an indirect connection decrease with distance in the network, while the cost of a link depends on the type of agents involved in it as well as the rest of linkage decisions of both of them. Two individuals from the same community always face a low linking cost. The cost of forming a relationship for two individuals belonging to different communities diminishes with the rate of exposure of each of them to the other community. As a result, our model introduces endogenous social distances that rely on individual positions in the network. We derive a number of results with regard to equilibrium networks: (i) socialization among the same type of agents might be weak even if the within-type link cost is very low; (ii) oppositional identity patterns can arise for a wide range of parameters; (iii) integrated networks can be socially preferable to segregated networks.