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

105 Pages Posted: 17 Sep 2018

See all articles by Chih-Sheng Hsieh

Chih-Sheng Hsieh

National Taiwan University

Michael König

University of Zurich - Department of Economics

Xiaodong Liu

University of Colorado at Boulder - Department of Economics

Date Written: September 2018

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: key player, mergers and acquisitions, network formation, peer effects, Subsidies, technology spillovers

JEL Classification: C11, C63, C73, D83, 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 (September 2018). CEPR Discussion Paper No. DP13161, Available at SSRN: https://ssrn.com/abstract=3247233

Chih-Sheng Hsieh (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Michael König

University of Zurich - Department of Economics ( email )

Zürich
Switzerland

Xiaodong Liu

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

Campus Box 256
Boulder, CO 80309
United States

HOME PAGE: http://spot.colorado.edu/~xiaodong/

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