Peer Effects in Endogenous Networks

This paper presents a simple model of strategic network formation with local com- plementarities in effort levels and positive local externalities. Equilibrium networks display - other than the complete and the empty network - a core-periphery structure, which is commonly observed in empirical studies. Ex-ante homogenous agents may obtain very different ex-post outcomes. These findings are relevant for a wide range of social and economic phenomena, such as educational attainment, criminal activity, labor market participation and R&D expenditures of rms.