Cemmap Working Paper (CWP54/16)

Identifying preferences in networks with bounded degree

Date: 16 December 2016
Publisher: The IFS
DOI: 10.1920/wp.cem.2016.5416

This paper provides a framework for identifying preferences in a large network where links are pairwise stable. Network formation models present dificulties for identification, especially when links can be interdependent: e.g., when indirect connections matter. We show how one can use the observed proportions of various local network structures to learn about the underlying preference parameters. The key assumption for our approach restricts individuals to have bounded degree in equilibrium, implying a fi nite number of payoff -relevant local structures. Our main result provides necessary conditions for parameters to belong to the identi fied set. We then develop a quadratic programming algorithm that can be used to construct this set. With further restrictions on preferences, we show that our conditions are also suficient for pairwise stability and therefore characterize the identi fied set precisely. Overall, the use of both the economic model along with pairwise stability allows us to obtain e ffective dimension reduction.