Two-step Estimation of Network Formation Models with Unobserved Heterogeneities and Strategic Interactions

Shaomin Wu

Papers from arXiv.org

Abstract: 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.

Date: 2024-04
New Economics Papers: this item is included in nep-dcm, nep-ecm, nep-gth and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2404.12581

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