Estimating Local Network Externalities

28 Pages Posted: 21 Nov 2006 Last revised: 19 Feb 2016

See all articles by Margherita Comola

Margherita Comola

Paris School of Economics (PSE); Université Paris I Panthéon-Sorbonne

Date Written: February 18, 2016


This paper illustrates a procedure to estimate externalities from indirect connections (so-called network externalities) using network data. This structural approach is suitable for static games of endogenous network formation with partial information, and relies on the equilibrium conditions of pairwise stability (Jackson and Wolinsky, 1996). Operationally, it consists in a two-step estimator which addresses omitted variable endogeneity. When the estimation protocol is applied to risk-sharing data within a Tanzanian village, results indicate that indirect connections matter. Network externalities are found to be negative, which can be interpreted as competition over scarce resources.

Keywords: Network Externalities; Pairwise Stability; Risk-sharing

JEL Classification: C45, D85, O12

Suggested Citation

Comola, Margherita, Estimating Local Network Externalities (February 18, 2016). Available at SSRN: or

Margherita Comola (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005

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