Comparative Advantage in Social Interactions∗

We propose a model of social interactions based on comparative advantage. When comparative advantage is the guiding principle of social interactions, the effect of moving a student into an environment with higher-achieving peers depends on where in the ability distribution she falls and the shadow prices that clear the social market. We show that the model’s key prediction–an individual’s ordinal rank predicts her behavior and test scores, ceteris paribus–is borne out in one randomized controlled trial in Kenya as well as two large observational data sets from the U.S. To test whether comparative advantage can explain the effect of rank on outcomes, we conduct an experiment with nearly 600 public school students in Houston. The experimental results suggest that social interactions are, at least in part, governed by comparative advantage. ∗Previous versions of this paper circulated under the title “A Roy Model of Social Interactions.” We are grateful to Gary Becker, Edward Glaeser, Bryan Graham, Richard Holden, Lawrence Katz, Steven Levitt, Franziska Michor, Bruce Sacerdote, Chris Shannon, Jesse Shapiro, Andrei Shleifer, Glen Weyl, as well as seminar participants at Harvard and Chicago for many helpful comments and suggestions. Brad Allan, Vilsa Curto, Tanaya Devi, Matt Davis, Ryan Fagan, Natalya Naumenko, and Wonhee Park provided excellent research assistance. Financial support from the Weatherhead Center for International Affairs and Institute for Humane Studies [Cicala], the Education Innovation Lab at Harvard University [Fryer], and the German National Academic Foundation [Spenkuch] is gratefully acknowledged. Correspondence can be addressed to the authors at Harris School of Public Policy, University of Chicago, 1155 E 60th Street, Chicago IL 60637 [Cicala]; Department of Economics, Harvard University, 1805 Cambridge Street, Cambridge MA 02138 [Fryer]; MEDS Department, Kellogg School of Management, 2001 Sheridan Road, Evanston IL 60208 [Spenkuch]; or by e-mail: [email protected] [Cicala], [email protected] [Fryer], or [email protected] [Spenkuch]. The usual caveat applies.