The Estimation of Network Formation Games with Positive Spillovers

Abstract

I present a behavioural model of network formation with positive network externalities in which individuals have preferences for being part of a clique. The behavioural model leads to an associated supermodular (Topkis, 1979) normal form game. I show that the behavioural model converges to the greatest Nash equilibrium of the associated normal-form game. I propose an approximate Bayesian computation (ABC) framework, using original summary statistics, to make inferences about individuals' preferences, and provide an illustration using data on high school friendships.

Keywords: Network Formation, Supermodular Games, Approximate Bayesian Computation

JEL Classification: D85, C11, C15, C72