By changing the relative cost of the different ways in which people gather information, today''s information and communications technology enables denser social networks. That is one of the findings of experimental research by Sanjeev Goyal, Stephanie Rosenkranz, Utz Weitzel and Vincent Buskens, which is published in the November 2017 issue of the Economic Journal.
Their study notes that the development of modern information technology creates a platform for extensive online social engagement. In principle, this can have a large impact on the relative cost of different ways of accessing information.
Usually individuals acquire information either through private research or by communicating with other people. But both private acquisition and creating and maintaining personal contacts take time and resources. The new study examines the economic effects of changing the relative cost of different ways of gathering information.
The researchers use laboratory experiments to study this trade-off as they make it possible to control the main variables directly: the costs and benefits of linking and of individual information provision.
The study finds that a fall in the relative costs of linking leads to more dispersed investment in individual information provision and that this is accompanied by denser social networks. This has interesting and large effects on welfare.
Moreover, the researchers find that aggregate investment in information provision is increasing in the costs of linking. Thus developments in technology have the potential for having a major impact on the distribution as well as in the overall level of information provision.
Since information has principally the features of a public good, the new study is a contribution to research on public goods and networks. In previous work on public goods experiments, an important general finding is that individuals contribute more than what theory predicts though they contribute less than the first best. Thus, individual utility is generally higher than the Nash equilibrium level.
The principal novelty of the new study is that individual choices determine whether their actions and others'' actions become public goods or remain ''private''. This is due to the possibility of forming links.
The experiment reveals that this ''endogeneity'' of public goods has important implications for behaviour and welfare. With increasing linking costs, aggregate investment in the ''public'' good rises, but due to lesser linking, every individual has access to the same amount of it.
Moreover, in all treatments, endogeneity of links leads to outcomes that are worse than the worst Nash equilibrium (in terms of aggregate welfare). But a reduction in linking costs due to the development of modern information technology increases welfare as it reduces redundancy and thus overprovision of information.
''Information Acquisition and Exchange in Social Networks'' by Sanjeev Goyal, Stephanie Rosenkranz, Utz Weitzel and Vincent Buskens is published in the November 2017 issue of the Economic Journal. Sanjeev Goyal is Chair of the Faculty of Economics at the University of Cambridge. Stephanie Rosenkranz and Vincent Buskens are at Utrecht University. Utz Weitzel is at Radboud University Nijmegen.
