cemmap working paper, Centre for Microdata Methods and Practice CWP29/15
This paper provides a framework for identifying preferences in a large network under the assumption of pairwise stability of network links. Network data present difficulties for identification, especially when links between nodes in a network can be interdependent: e.g., where indirect connections matter. Given a preference specification, we use the observed proportions of various possible payoff-relevant local network structures to learn about the underlying parameters. We show how one can map the observed proportions of these local structures to sets of parameters that are consistent with the model and the data. Our main result provides necessary conditions for parameters to belong to the identified set, and this result holds for a wide class of models. We also provide sufficient conditions - and hence a characterization of the identified set - for two empirically relevant classes of specifications. An interesting feature of our approach is the use of the economic model under pairwise stability as a vehicle for effective dimension reduction. The paper then provides a quadratic programming algorithm that can be used to construct the identified sets. This algorithm is illustrated with a pair of simulation exercises.