SMU SOE Seminar (Dec 11, 2017): Estimation of Social Interactions in Endogenous and Strategically Formed Networks

mso-fareast-font-family:"Times New Roman";color:black">This paper considers a social interaction model where the outcome of an individual may be influenced by the characteristics of her friends. The friendships are formed endogenously through a strategic network formation model that allows for utility externality from indirect friends like friends of friends and friends in common. Both the network formation and individual outcomes are affected by certain unobserved individual heterogeneity, rendering the friendships to be endogenous in the outcome equation. We extend the framework in Ridder and Sheng (2017) by introducing individual fixed effects, and propose a two-step estimation procedure to estimate these fixed effects together with other model parameters. The outcome equation can be consistently estimated by controlling for the individual fixed effects estimated from the formation model.