Essays on Social Networks and Political Economy

Abstract

This dissertation consists of two original studies in social networks and one original study in political economy. In the first two chapters, I study (i) how social networks form, and (ii) how economic agents optimize their behaviors for a given network structure. In the last chapter, I examine how election rules affect individual voting decisions and ultimate election outcomes. In Chapter 1, Social Network Formation and Strategic Interaction in Large Networks, I present a dynamic network formation model that aims to explain why some empirical degree distributions exhibit the increasing hazard rate property (IHRP). In my model, a sequentially arriving node forms a link with one existing node through a bilateral agreement. newborn node prefers a highly linked node; however, the more links an existing node has, the more the marginal return from an additional link diminishes. I prove that the IHRP emerges if and only if the latter effect prevails over the former. I present two implications of the IHRP for strategic interactions in networks. First, when there is uncertainty about neighboring agents' connectivity, the IHRP guarantees that a unique Bayesian equilibrium exists in a network game with strategic complementarities. Second, the IHRP characterizes a monotone revenue-maximizing mechanism with allocative externalities. In Chapter 2, Monopoly Pricing and Diffusion of a (Social) Network Good, I present a model of dynamic pricing and diffusion of a network good sold by a monopolist. In the model, the network good is a subscription social network good. This means that in each period, each consumer has to pay a subscription price to use the good, and the utility derived from subscribing to the good increases as more of her neighboring consumers subscribe. Consumers myopically optimize their subscription decisions, and the monopolist chooses a sequence of subscription prices that maximizes his discounted sum of per-period profits. Three main results emerge. First, I characterize a unique steady state of the monopoly market. Second, I find that optimal sequences of subscription prices oscillate around the subscription price at the steady state as time passes. Third, I analyze how changes in the monopolist's discount factor and the density of the social network affect the subscription price, subscription rate, and deadweight loss at the steady state. In Chapter 3, A Model of Pre-Electoral Coalition Formation, I study how two different election rules, simple plurality (e.g., as in South Korea) and two-round runoff (e.g., as in France), affect political candidates’ incentives to form pre-electoral coalitions (PECs). In my model, three candidates compete for a single office, and two candidates can form a PEC. Since the candidates are both policy- and office-motivated, one candidate can incentivize the other candidate to withdraw his candidacy by choosing a joint policy platform. I find that PECs are more likely to form in plurality elections than in two-round runoff elections. I further examine how other electoral environments, such as ideological distance and pre-election polls, influence incentives to form PECs.