Two-Step Estimation of a Strategic Network Formation Model with Clustering
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| Format: | Preprint |
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2020
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| _version_ | 1866908388083892224 |
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| author | Ridder, Geert Sheng, Shuyang |
| author_facet | Ridder, Geert Sheng, Shuyang |
| contents | This paper explores strategic network formation under incomplete information using data from a single large network. We allow the utility function to be nonseparable in an individual's link choices to capture the spillover effects from friends in common. In a network with n individuals, an individual with a nonseparable utility function chooses between 2^{n-1} overlapping portfolios of links. We develop a novel approach that applies the Legendre transform to the utility function so that the optimal link choices can be represented as a sequence of correlated binary choices. The link dependence that results from the preference for friends in common is captured by an auxiliary variable introduced by the Legendre transform. We propose a two-step estimator that is consistent and asymptotically normal. We also derive a limiting approximation of the game as n grows large that simplifies the computation in large networks. We apply these methods to favor exchange networks in rural India and find that the direction of support from a mutual link matters in facilitating favor provision. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2001_03838 |
| institution | arXiv |
| publishDate | 2020 |
| record_format | arxiv |
| spellingShingle | Two-Step Estimation of a Strategic Network Formation Model with Clustering Ridder, Geert Sheng, Shuyang Econometrics This paper explores strategic network formation under incomplete information using data from a single large network. We allow the utility function to be nonseparable in an individual's link choices to capture the spillover effects from friends in common. In a network with n individuals, an individual with a nonseparable utility function chooses between 2^{n-1} overlapping portfolios of links. We develop a novel approach that applies the Legendre transform to the utility function so that the optimal link choices can be represented as a sequence of correlated binary choices. The link dependence that results from the preference for friends in common is captured by an auxiliary variable introduced by the Legendre transform. We propose a two-step estimator that is consistent and asymptotically normal. We also derive a limiting approximation of the game as n grows large that simplifies the computation in large networks. We apply these methods to favor exchange networks in rural India and find that the direction of support from a mutual link matters in facilitating favor provision. |
| title | Two-Step Estimation of a Strategic Network Formation Model with Clustering |
| topic | Econometrics |
| url | https://arxiv.org/abs/2001.03838 |