“The Strength of Ties and Referrals: Theory and Evidence from an Online Social Network” by Yee Wai CHONG
Yee Wai CHONG
The structure of social networks provides constraints and opportunities on important economic activities like public good provision and innovation sharing. Studying how network ties are formed, therefore, has valuable economic applications. In this paper, I study a common method of tie formation, 3-point referrals, where two strangers (A and B) form a tie with each other through the introduction of a mutual acquaintance (M). I propose two mechanisms by which the strength of existing ties between A-M and B-M affect referral decisions. Stronger ties mean i) M has more information on A and B’s payoffs ii) M has more empathy on A and B’s payoffs. Game theoretical analysis at the triad level predicts that more information and balanced empathy result in more referrals, as A and B put more trust on M’s referral decision and increase the probability that they initiate/accept a contact request through M’s referral. Using 3-point referral data from an online business social network, www.LinkedIn.com, I find evidence that both mechanisms are at work. This paper contributes to the existing social network literature in three dimensions – firstly, by linking strategic new tie formation to existing broader network structure; secondly, by providing empirical evidence from a large-scale, novel dataset; and thirdly, by providing policy guidelines for online network administrators on how to increase the total activity (and ex-ante welfare) in online social networks.