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

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