Similarity and Polarization in Groups

The focus of this paper is the endogenous formation of peer groups. We study a model in which agents choose their peers prior to making decisions on multiple issues. Agents differ in how much they value the decision outcomes on one issue relative to another. While each individual can collect information on at most one issue, all information is shared within the group. Thus, the group's preference composition aspects the type of information that gets collected. We characterize stable groups, groups that are optimal for all their members. When information is free, stable groups must be sufficiently homogeneous. Furthermore, stability requires more similarity among extremists than among moderate individuals. When information is costly, a free rider problem appears, and makes extreme peers more desirable as they are more willing to invest in information acquisition. We show that, as group size grows, polarization arises and becomes increasingly extreme in stable groups. Finally, we illustrate that (inefficient) segregation can emerge in a finite heterogeneous population in which each agent selects which group to join. We demonstrate that segregation is easier to sustain the more extreme preferences are