Bilateral exchanges in social networks and the design of public institutions

Abstract

In this thesis, I study bilateral exchanges in social networks. I integrate the market based approach in economics and network based approach in sociology. I also give a joint model of externalities and peer pressure in networks and propose mechanisms to control externalities in networked societies. The study of exchanges in networks is big and growing. In this thesis, I focus on exclusive exchanges or matching in bipartite networks where the matched couples perform an economic exchange with each other. This thesis makes three contributions to matching theory. First, I relax the standard assumptions of costless transfers between matched couples and introduce a new algorithm to compute stable matchings or core with proofs of correctness and convergence. Second, I introduce a new distributed dynamics and show that it converges to stable matching. Third, I give an axiomatic characterization of fair outcomes in bipartite matching based upon a collective bargaining argument and give a fast algorithm to compute it. I also introduce a joint model of externalities and peer pressure in networks and propose new design of public institutions that are more efficient in the control of externalities in networked societies. The design principles I propose are well suited for environmental policies, and health policies. The same design principles can also be used for marketing and revenue management for products and services with network externalities. I demonstrate the efficiency of my policies in two experiments. The first experiment showed that my proposed policies give better outcome in promoting higher physical activity among people than traditional policies such as Pigouvian subsidies. The second experiment showed that my proposed policy can help promote energy conservation and I report much higher conservation than any achieved through price shocks or any other energy conservation experiment in my knowledge.