Approximate Variational Inference for a Model of Social Interactions

Abstract

This paper proposes approximate variational inference methods for estimation of a strategic model of social interactions. Players interact in an exogenous network and sequentially choose a binary action. The utility of an action is a function of the choices of neighbors in the network. I prove that the interaction process can be represented as a potential game and it converges to a unique stationary equilibrium distribution. However, exact inference for this model is infeasible because of a computationally intractable likelihood, which cannot be evaluated even when there are few players. To overcome this problem, I propose variational approximations for the likelihood that allow approximate inference. This technique can be applied to any discrete exponential family, and therefore it is a general tool for inference in models with a large number of players. The methodology is illustrated with several simulated datasets and compared with MCMC methods.

Keywords: Bayesian Methods, Microeconometrics

JEL Classification: D85, C13, C73