Equilibrium Homophily in Networks
50 Pages Posted: 1 Nov 2018
Date Written: September 01, 2018
I look at the equilibrium effects of homophily in network formation games having positive externalities. I show that very weak preferences for network effects (such as preference for being part of a clique) may result in very high levels of homophily at equilibrium. I present an empirical procedure that allows an evaluation of the role of network effects on the observed level of homophily in the data. I apply my method to the formation of friendship networks in the USA. I show that the focus on a random utility model implies that network effects are small and have a negligible contribution to the observed racial homophily in friendship networks.
Keywords: Homophily, Network Formation, Supermodular Games, Approximate Bayesian Computation
JEL Classification: D85, C11, C15, C72
Suggested Citation: Suggested Citation