Strategic Experimentation in Networks

This paper examines experimentation and innovation when experimental results diffuse along social links. This public-goods nature of experimentation is a feature of many areas of economics, such as consumer choice, research and development, and agriculture. The paper asks: How do different patterns of social and geographic links affect experimentation? Who experiments and who free rides? Do more links enhance or diminish social welfare? The analysis finds, first, that social networks can foster specialization. In every social network there is an equilibrium where some individuals experiment and others completely free-ride. In many networks this extreme is the only equilibrium outcome. Second, specialization can benefit society as a whole. This outcome arises when specialists are linked, collectively, to many agents. Finally, new links can reduce overall welfare. A new link increases access to new results, but also reduces an individual’s incentives to conduct his own experiments. Hence, overall welfare can be higher when there are holes in a network. JEL Codes: D00, D83, H41, O31. *Bramoullé: Department of Economics, Laval University. Kranton: Department of Economics, University of Maryland. We thank seminar participants of the Pew Charitable Trust Working Group on The Moral and Social Dimensions of Microeconomic Behavior In Low-Income Communities, the 2003 Annual Meeting of the Society for Economic Dynamics, the Summer School in San Sebastian, the Russell Sage Foundation Working Group on Formation and Decay of Economic Networks, the Roy-Malinvaud Seminar, Brown, Columbia, Duke, Michigan, GREQAM, Johns Hopkins, UCL, Universitat Autònoma de Barcelona, and especially Salvador Barbera, Patrick Bolton, Antonio Cabrales, Antoni Calvó-Armengol, Sanjeev Goyal, and François Salanié for comments and discussions. Rachel Kranton thanks the Pew Charitable Trust for its funding, the Institute for Advanced Study, where she was a Deutsche Bank Member of the School of Social Science, for hospitality and financial support, and Princeton’s International Economics Section and Research Program for Development Studies for their hospitality.