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An Economic Model of Friendship: Homophily, Minorities and Segregation

We develop a model of friendship formation that sheds light on segregation patterns observed in social and economic networks. Individuals come in different types and have type-dependent benefits from friendships, and we examine properties of a steady-state equilibrium of a matching process of friendship formation. We use the model to understand three empirical patterns of friendship formation: (i) larger groups are relatively more biased towards forming same-type ties, (ii) larger groups form more ties per capita, and (iii) all groups are biased towards same-type relative to demographics, with the most extreme bias coming from middle-sized groups. We trace each of these empirical observations to specific properties of the theoretical model and highlight the role of choice and opportunities in generating homophilous behavior. Finally we discuss welfare implications of the model. This is joint work with with Sergio Currarini and Paolo Pin.