Two-step Estimation of Network Formation Models with Unobserved Heterogeneities and Strategic Interactions
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| Format: | Preprint |
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2024
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| _version_ | 1866917644956860416 |
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| author | Wu, Shaomin |
| author_facet | Wu, Shaomin |
| contents | In this paper, I characterize the network formation process as a static game of incomplete information, where the latent payoff of forming a link between two individuals depends on the structure of the network, as well as private information on agents' attributes. I allow agents' private unobserved attributes to be correlated with observed attributes through individual fixed effects. Using data from a single large network, I propose a two-step estimator for the model primitives. In the first step, I estimate agents' equilibrium beliefs of other people's choice probabilities. In the second step, I plug in the first-step estimator to the conditional choice probability expression and estimate the model parameters and the unobserved individual fixed effects together using Joint MLE. Assuming that the observed attributes are discrete, I showed that the first step estimator is uniformly consistent with rate $N^{-1/4}$, where $N$ is the total number of linking proposals. I also show that the second-step estimator converges asymptotically to a normal distribution at the same rate. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2404_12581 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Two-step Estimation of Network Formation Models with Unobserved Heterogeneities and Strategic Interactions Wu, Shaomin Econometrics In this paper, I characterize the network formation process as a static game of incomplete information, where the latent payoff of forming a link between two individuals depends on the structure of the network, as well as private information on agents' attributes. I allow agents' private unobserved attributes to be correlated with observed attributes through individual fixed effects. Using data from a single large network, I propose a two-step estimator for the model primitives. In the first step, I estimate agents' equilibrium beliefs of other people's choice probabilities. In the second step, I plug in the first-step estimator to the conditional choice probability expression and estimate the model parameters and the unobserved individual fixed effects together using Joint MLE. Assuming that the observed attributes are discrete, I showed that the first step estimator is uniformly consistent with rate $N^{-1/4}$, where $N$ is the total number of linking proposals. I also show that the second-step estimator converges asymptotically to a normal distribution at the same rate. |
| title | Two-step Estimation of Network Formation Models with Unobserved Heterogeneities and Strategic Interactions |
| topic | Econometrics |
| url | https://arxiv.org/abs/2404.12581 |