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...ributions to microeconomic theory have used network structures for such diverse issues as the internal organization of firms (e.g., Boorman [2], Keren and Levhari [16]), employment search (Montgomery =-=[18]-=-), systems compatibility (see Katz and Shapiro [15]), information transmission (Goyal [5]), and the structure of airline routes (Hendricks, et al. [7, 8], Starr and Stinchcombe [26]). Third, there is ...

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...nt economic outcomes. I begin with the allocation of labor. Social Structure and Labor Markets Economic models typically assume that workers and jobs are matched through a search whose costs and benefits are equalized at the margin (Granovetter, 1995b, pp. 141–146). But in most real labor markets, social networks play a key role. Prospective employers and employees prefer to learn about one another from personal sources whose information they trust. This is an example of what has been called “social capital” (Lin, 2001). It has obvious links to theories of asymmetric information (for example, Montgomery, 1991), with the difference that unlike in most such models, there is what one might call bilateral asymmetry—both employer and employee have information about their own “quality” that the other needs. In the classic “lemons” model of Akerlof (1970), by contrast, the seller of a used car considers all buyers interchangeable and does not require subtle information about them. Because all social interaction unavoidably transmits information, details about employers, employees and jobs flow continuously through social networks that people maintain in large part for non-economic reasons. Since individua...

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...s in their network should be better insured. If, on the other hand, risk sharing is primarily a function of one’s success in linking up with people who have uncorrelated incomes (e.g., Foster and Rosenzweig (1995)), then households with more diversified networks should be better insured.19 Finally, if only better off households can afford to give and lend, knowing only poor people offers _ _____________ 19 The first hypothesis can be seen as a version of the ’strong link’ hypothesis discussed in the sociology and labor search literatures, while the second is an example of a ’weak link’ (e.g., Montgomery (1991), Raub and Weesie (1990)). 25 little help against financial distress. To test these ideas, we construct four new variables: number of people in the respondent’s network; share of family members in the total network; an index of geographical location diversity of the respondent’s network;20 and a weighted index of prosperity of network members (1 for rich, 4 for poor). To minimize endogeneity bias, all these variables refer to individuals the respondent listed at the onset of the survey as potential sources of assistance, not to the actual people who subsequently helped or were helped by the re...

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...re are also other tests that are possible. For instance, there is data concerning how the reliance on networks for finding jobs varies across professions, age, and race groups, etc. (see the table in =-=Montgomery, 1991-=-, for instance, to see some differences across professions). Our model then predicts that the intensity of clustering, duration dependence, and drop-out rates should also vary across these socioeconom...