Economic Analysis Of Social Interactions:a Review

People are influenced by others in everyday decision making, the popularity of expressions like fashion, role model, keeping up with the Joneses, following the mainstream serving as a proof of it. The interaction between one’s behavior and others’is a major issue of numerous research in sociology and social psychology, but was literally ignored for a long time in economics, which boasts as the science of individual choice. The dominate theory on individual choice in modern economics is rational choice theory. In rational choice theory every man is modeled as a "rational man" with rational preferences, which means that his preference over all of the alternatives in his choice set satisfies the properties of completeness and transitivity. All of these rational men make their choices independently according to the market prices. In such models the social influence on one’s choice is totally absent. But in last two decades, especially in last decade the conduct of economics changed dramatically. Social factors influencing individual behavior got more and more attention in economic research. Economists call this kind of research "economic analysis of social interactions", where social interactions referring to every kind of social factors.This thesis gives a synthesis and review of economic analysis of social interactions. It answers such basic questions as what social interactions mean, who are the actors in social interactions and how social interactions operate. By answering these questions I make clear the theoretical framework of social interaction research. In the process of answering these questions I reviewed major contributions of early economists on social interactions research, in order to find the trace of development of the research. I made clear the mechanisms through which social interactions operate, namely cultural transmission, peer pressure and social learning. Social structure and identity also play important roles in social interaction research. Social interactions also have interesting consequence on the group level such as multiple equilibrium and phase transition. I give a overall assessment on social interactions research at last.