This dissertation consists of two essays, which address the question of how social interactions shape economic outcomes. The first essay examines crime and criminal networks. The second one studies immigration, assimilation, and ethnic enclaves.

The first essay offers a formal model of crime. Criminals often do not act alone. Rather, they form networks of collaboration. How does law enforcement affect criminal activity and structure of those networks? Using a network game, I show that increased enforcement actually can lead to sparse networks and thereby to an increase in criminal activity. When criminal activity requires a certain degree of specialization, criminals will form sparse networks, which generate the highest level of crime and are the hardest to disrupt. I also show that heavy surveillance and large fines do not deter crime for these networks.

The second essay examines the impact that residential location decisions have on economic outcomes of immigrants. About two thirds of the immigrants that arrived to the United States between 1997 and 2006 settled in six States only. Using a simultaneous-move game on residential choices I show that when all immigrants are unskilled they cluster in an enclave and earn very low wages, although they would be better off assimilating. Hence the enclave is `trap'. Introducing skill heterogeneity among immigrants reverses the result: the enclave equilibrium becomes socially preferred to assimilation.