|By:||A. Stefano Caria
We run an artefactual field experiment in rural India which tests whether farmers can create efficient networks in a repeated link formation game, and whether group categorization results in homophily and loss of network efficiency. We find that the efficiency of the networks formed in the experiment is significantly lower than the efficiency which could be achieved under selfish, rational play. Many individual decisions are consistent with selfish rationality and with a concern for overall welfare, but the tendency to link with the ‘most popular’ farmer in the network causes large efficiency losses. When information about group membership is disclosed, social networks become more homophilous, but not significantly less efficient. Networks play an important role in the diffusion of innovations in developing countries. If they are inefficiently structured, there is scope for development policies that support diffusion.