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Network Formation with Local Complements and Global Substitutes: The Case of R&D Networks

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  • Hsieh, Chih-Sheng
  • König, Michael
  • Liu, Xiaodong

Abstract

We introduce a stochastic network formation model where agents choose both actions and links. Neighbors in the network benefit from each other's action levels through local complementarities and there exists a global interaction effect reflecting a strategic substitutability in actions. We provide a complete equilibrium characterization in the form of a Gibbs measure, and show that the model is consistent with empirically observed networks. We then use our equilibrium characterization to show that the model can be conveniently estimated even for large networks. The policy relevance is demonstrated with examples of firm exit, mergers and subsidies in R&D collaboration networks.

Suggested Citation

  • Hsieh, Chih-Sheng & König, Michael & Liu, Xiaodong, 2018. "Network Formation with Local Complements and Global Substitutes: The Case of R&D Networks," CEPR Discussion Papers 13161, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13161
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    Keywords

    key player; mergers and acquisitions; network formation; peer effects; Subsidies; technology spillovers;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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