Network Formation with Local Complements and Global Substitutes: The Case of R&D Networks

University of Zurich, Department of Economics, Working Paper No. 217

102 Pages Posted: 16 Feb 2017

See all articles by Chih-Sheng Hsieh

Chih-Sheng Hsieh

The Chinese University of Hong Kong (CUHK)

Michael König

University of Zurich - Department of Economics

Xiaodong Liu

University of Colorado at Boulder - Department of Economics

Date Written: February 13, 2017

Abstract

In this paper 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. The tractability of the model allows us to provide a complete equilibrium characterization in the form of a Gibbs measure, and we show that the structural features of equilibrium networks are 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 acquisitions and subsidies in the context of R&D collaboration networks.

Keywords: Network formation, peer effects, technology spillovers, key player, mergers and acquisitions, subsidies

JEL Classification: C11, C15, C63, C73, D83, D85, L22

Suggested Citation

Hsieh, Chih-Sheng and König, Michael and Liu, Xiaodong, Network Formation with Local Complements and Global Substitutes: The Case of R&D Networks (February 13, 2017). University of Zurich, Department of Economics, Working Paper No. 217, Available at SSRN: https://ssrn.com/abstract=2917560 or http://dx.doi.org/10.2139/ssrn.2917560

Chih-Sheng Hsieh (Contact Author)

The Chinese University of Hong Kong (CUHK)

Shatin, N.T.
Hong Kong
Hong Kong

Michael König

University of Zurich - Department of Economics ( email )

Zürich
Switzerland

Xiaodong Liu

University of Colorado at Boulder - Department of Economics ( email )

Economics Building Rm 212 256 UCB
Boulder, CO 80309-0256
United States

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