This paper introduces a tractable model to study incentive-compatible homophily under both external environments--such as exogenous shocks or policy constraints--and internal micromotives based on interactive attributes. We propose a set of invariants that capture main features of homophily and the well-defined partition dynamics leading to perfect global homophily. The criteria for homophily formation are characterized via isomorphism. Within this framework, we demonstrate the emergence of macro-complementarity coupled with micro-substitution, where local individuals' utility function is nonlinear and submodular. We discuss two types of financial networks and their differences: hierarchical structure emerges from short-term liquidity transactions, whereas core-periphery structure is based on a stock-based perspective.
@article{arxiv.2510.09821,
title = {Emergence of Homophily under Contextual Mechanisms},
author = {Jiaxing Weng and Haijun Yang and Tongyu Wang},
journal= {arXiv preprint arXiv:2510.09821},
year = {2025}
}