Diffusion of innovations in dense and sparse networks

This paper puts forward a comparison of the performance of sparsely and densely connected social networks in promoting the diffusion of innovations of uncertain profitability. To this end, we use a threshold model of innovation diffusion, based on a classic model of adoption of innovations via imitation by Jensen (1988), to evaluate the probability of diffusion of an innovation in three classes of networks: the circular, the star-shaped and the complete networks. We find that, if agents hold a low prior confidence in the profitability of an innovation, then complete networks and star networks with fully rational agents (i.e., with agents who are aware of the structure of the network and use this information rationally) perform better than circles and than stars with myopic agents. The converse is true for innovations accompanied by initial high expectations about their profitability.