2020/01/12 by Geert Ridder, Ridder, Geert, Shuyang Sheng +1 · 1 citation
Business, Management and Accounting · Decision Sciences · Social Sciences · #Digital Platforms and Economics #Econometrics (econ.EM) #Experimental Behavioral Economics Studies #FOS: Economics and business #Game Theory and Applications
paper · pdf · doi:10.48550/arxiv.2001.03838
openalex publication_date 2020/01/12 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
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 2n-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.