Social Interactions and Spillovers: Incentives, Segregation and Topology∗

The aim of this paper is to understand the interactions between productive effort and the creation of synergies that are the sources of technological collaboration agreements, agglomeration, and social interactions. We model this interaction in a way that allows us to characterize how agents devote resources to both activities. This permits a full-fledged equilibrium/welfare analysis of network formation with endogenous productive efforts, to derive unambiguous comparative statics results and to analyze community sorting by individual traits. In spite of its parsimony the model retains enough richness to replicate a broad range of empirical regularities displayed by social and economic networks, and to relate them to individual and social welfare.