Working Paper: CEPR ID: DP13161
Authors: Michael Knig; Chihsheng Hsieh; Xiaodong Liu
Abstract: We introduce a stochastic network formation model where agents choose both actions and links. Neighbors in the network benefit from each other’s action levels through local complementarities and there exists a global interaction effect reflecting a strategic substitutability in actions. We provide a complete equilibrium characterization in the form of a Gibbs measure, and show that the model is consistent with empirically observed networks. We then use our equilibrium characterization to show that the model can be conveniently estimated even for large networks. The policy relevance is demonstrated with examples of firm exit, mergers and subsidies in R&D collaboration networks.
Keywords: network formation; peer effects; technology spillovers; key player mergers and acquisitions; subsidies
JEL Codes: C11; C63; C73; D83; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RD collaborations (Y80) | output (C67) |
| RD collaborations (Y80) | investment (G31) |
| technology spillovers (O33) | output (C67) |
| technology spillovers (O33) | investment (G31) |
| competition effects (L13) | output (C67) |
| competition effects (L13) | investment (G31) |
| exit of a key player (J63) | overall welfare (I31) |
| mergers (G34) | welfare gains (D69) |
| mergers (G34) | welfare losses (D69) |
| network structure (D85) | firm behavior (D21) |