A Structural Pairwise Network Model with Individual Heterogeneity

Posted: 8 Oct 2016

See all articles by Zhentao Shi

Zhentao Shi

Department of Economics, the Chinese University of Hong Kong

Xi Chen

Department of Health Policy and Management; Yale University - Department of Economics; Yale University - Yale Institution for Social and Policy Studies; IZA

Date Written: October 1, 2016

Abstract

Pairwise binary regressions are widely used to predict network links by each pair of agents' observed attributes. We propose a new structural pairwise network model based on individual utility maximization. In this model, the econometrician, as an outsider, witnesses a link if and only if both agents prefer it, while the agent is willing to create a bond with a peer if he or she gains positive individual utility from the potential connection. Besides observed personal attributes, unobservable individual heterogeneity enters the random utility as an additive fixed effect. The fixed effects enhance the applicability of the model, but impose technical challenges as they are buried in nonlinear functions. To identify and estimate the model, we exploit the special panel-data structure. In a network of n individuals, we can view one's linking outcomes to all the n-1 peers as a within-group observation, so that the network provides n overlapping groups. We treat each fixed effect term as an unknown parameter. Under a distributional assumption about the link-specific idiosyncratic shock, we establish consistency and asymptotic distribution for the maximum likelihood estimator of the common parameter. We apply this estimator to study the determinants of gift exchange in a network of village households in China.

Keywords: network, pairwise regression, panel data, random utility model, fixed effect

JEL Classification: C33, C57, O12

Suggested Citation

Shi, Zhentao and Chen, Xi, A Structural Pairwise Network Model with Individual Heterogeneity (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=2848375 or http://dx.doi.org/10.2139/ssrn.2848375

Zhentao Shi (Contact Author)

Department of Economics, the Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong

Xi Chen

Department of Health Policy and Management ( email )

60 College St
New Haven, CT 06520
United States

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Yale Institution for Social and Policy Studies ( email )

77 Prospect Street
New Haven, CT 06520
United States

HOME PAGE: http://isps.yale.edu/team/xi-chen

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