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Network formation is often said to be driven by social capital considerations. A typical pattern observed in the empirical data on strategic alliances is that of small world networks: dense subgroups of firms interconnected by (few) clique-spanning ties. The typical argument is that there is social capital value both to being embedded in a dense cluster, and to bridging disconnected clusters. In this paper the authors develop and analyze a simple model of joint innovation where they are able to reproduce these features, based solely on the assumption that successful partnering demands some intermediate amount of similarity between the partners.
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