Communication dynamics in endogenous social networks

Abstract

We develop a model of information exchange through communication and investigate its implications for information aggregation in large societies. An underlying state (of the world) determines which action has higher payoff. Agents decide which agents to form a communication link with incurring the associated cost and receive a private signal correlated with the underlying state. They then exchange information over the induced communication network until taking an (irreversible) action. We define asymptotic learning as the fraction of agents taking the correct action converging to one in probability as a society grows large. Under truthful communication, we show that asymptotic learning occurs if (and under some additional conditions, also only if) in the induced communication network most agents are a short distance away from "information hubs", which receive and distribute a large amount of information. Asymptotic learning therefore requires information to be aggregated in the hands of a few agents. We then provide a systematic investigation of what types of cost structures and associated social cliques (consisting of groups of individuals linked to each other at zero cost, such as friendship networks) ensure the emergence of communication networks that lead to asymptotic learning. Finally, we show how these results can be applied to several commonly studied random graph models, such as preferential attachment and Erdos-Renyi graphs.