Abstract:

We describe a common but largely unrecognized mechanism that produces and exacerbates intergroup inequality: the diffusion of valuable practices with positive network externalities through social networks whose members differentially possess characteristics associated with adoption. We examine two cases, the first to explicate the implications of the model, the second to demonstrate its utility in analyzing empirical data. In the first, the diffusion of Internet use, network effects increase the utility of adoption to friends and relatives of prior adopters. An agent-based model demonstrates positive, monotonic relationships, given externalities, between homophily bias and intergroup inequality in equilibrium adoption rates. In the second, rural/urban migration in Thailand, network effects reduce risk to persons whose networks include prior migrants. Using longitudinal individual-level migration data, we find that network homophily interacts with network externalities to induce inequality in migration rates among otherwise similar villages.

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