New working paper (in French): Social networks and socialism

This new piece of research studies the role of social networks in a “socialist” economy where access to goods is rationed (in the paper, this is because of a price cap, but the argument may apply to other forms of regulations). In the model, social networks develop as an alternative device to access a trading opportunity for those goods. As a result, people overinvest in social networks — at the margin, they make friends with people they do not really like, or spend too much time with their relatives, because such networking may provide useful consumption opportunities.
The most interesting result is that regulation may be sustained as a self-fulfilling political equilibrium. This may hold provided some people benefit from it. Here regulation maintains prices below their market clearing level. It benefits the “poor” because they have to pay less for the goods. It harms the “rich” whose income is lower in the regulated society (in the model it is because they own shares in the firms that produce the rationed goods). These “rich” include the “average” individual, who is also harmed due to the price distortion brought about by regulation. Only poor enough people benefit, and that is only because more efficient forms of redistribution are not available.
If people’s ability to invest in their social network is heterogeneous, the expectation of a regulated economy will lead to the emergence of a social group who is well equipped in social capital (and therefore expects to do well in a regulated economy), but with relatively low income. This social class benefits from regulation because they have a privileged access to the goods that are rationed, thanks to their superior social network. They benefit from low prices while not suffering too much from rationing. On the other hand, they are not poor enough to support regulation should they have not invested in their social capital. Therefore, these people validate expectations: if it is anticipated that the economy will be rigid, they invest in social networks and, because they are winners in the social networking game, end up voting in favor of regulation. If it is anticipated that markets will be left unregulated, they do not invest in social networks and vote against it. If this group of people is large enough, both rigidity and flexibilty are self-fulfilling outcomes.
The argument applies to social-democratic societies where a wide range of publicly provided goods are subjected to a price cap (or even free) and rationed. We may mention access to social housing, day care, medical care, summer camps, pension homes, music conservatories, and good schools. The model tells us that the system is supported by a social class of people who are relatively modest economically but well positioned to access those goods thanks to these connections. This article by Eric Le Boucher laments how opacity and complexity in the French higher education system ultimately favors the well-connected (in particular high school teachers) who know how to get into the right track. Indeed, high school teachers are modestly paid, but they are in an excellent situation to use their connections to get their children in the right place. And they have more free time than others that they can use to develop connections and gather information. They match the caracteristics of the social group I have just described.
Along similar lines, this article by Capital points out the pervasiveness of favoritism in the allocation of social housing in France; while sheer bribing is rare, social connections (and affinities) with the key decision makers is essential. One does not need to be miserable to be eligible for social housing. According to the article, 50 % of households in the Paris region are eligible — the proportion of social housing is less than 20 %. It is easy to figure out that among those 50%, the more connected and least poor among the eligible would be better-off in a free market system where they would not have spent as many resources to establish connections. But these resources are sunk costs and they end-up locked in in a situation where they gain from rigidity.

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