Small World Networks with Segregation Patterns and Brokers

Individuals' cognitive knowledge of their social networks is affected by systematic biases. This paper investigates the role of the mean degree bias, i.e. the tendency to underestimate the number of connections of others, in determining the structure of stable networks. It develops a strategic network formation model where agents have heterogeneous knowledge of the network: cognizant agents know the whole network, while ignorant ones are less knowledgeable and biased. For a broad range of parameters, all cognitively stable (CS) networks are small world networks with segregation patterns and brokers. There are also some CS networks with one hub.