Revealed Preference Tests of Network Formation Models

25 Pages Posted: 8 Oct 2013 Last revised: 9 Oct 2013

See all articles by Khai Chiong

Khai Chiong

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: October 1, 2013

Abstract

This paper proposes a revealed preference test of network formation models. Specifically, I consider network formation models where agents are (1) strategic, (2) externalities are confined to within an agent's k-neighborhood, where k can be varied. I show that this model can be tested using observation of a single network. I then derive necessary and sufficient condition under which the observed network is consistent with our strategic models of network formation. This non-parametric test takes the form of an algorithm involving the computation of color-preserving automorphisms of graphs. Building on the theoretical result, the test is implemented to calculate its' statistical power and to the Banerjee et al. (2012)'s social network data.

Keywords: Revealed preference, Networks formation, Social networks, Pair-wise stability, Model testing, Testable implications, Graph automorphism

JEL Classification: C52, C72, D85

Suggested Citation

Chiong, Khai, Revealed Preference Tests of Network Formation Models (October 1, 2013). NET Institute Working Paper No. 13-23. Available at SSRN: https://ssrn.com/abstract=2336396 or http://dx.doi.org/10.2139/ssrn.2336396

Khai Chiong (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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