Group formation and Diversity

We consider group formation in a population of individuals with heterogeneous preferences. Group formation involves two considerations: larger/more diverse groups are more efficient, but may make common decisions that are far away from the ideal actions of a large number of individuals. We demonstrate in this paper that the tradeoff between these two effects determines the composition of groups. We show that equilibrium results in maximin groups, where the worst-off individuals' payoffs are maximized. Such groups tend to be too small/homogenous by the utilitarian standard. Finally, we present an application where the efficiency benefit from joining a group comes from sharing private information. We show that an ex-ante improvement in individual agents' information may lead to a less informed society as a whole due to excessive fragmentation into groups.