Destabilizing segregation in friendship networks with farsighted agents

Abstract

We consider a model of friendship network formation based on de Marti and Zenou (2017) where individuals belong to two different communities and costs of forming links depend on community memberships. Once there are myopic and farsighted individuals in both communities, many inefficient friendship networks such as segregation, partial integration or partial assimilation become destabilized. In the case of low intra-community costs, either (for high inter-community costs) the network where the smaller community ends up being assimilated into the dominant community or (for low inter-community costs) the network where both communities are fully integrated is both stable and strongly efficient. In the case of intermediate intra-community costs, star networks with a myopic individual in the center are both stable and strongly efficient.