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.