Homophily, or the fact that similar individuals tend to interact with each other, is a prominent feature of economic and social networks. Most existing theories of homophily are based on a descriptive approach and abstract away from equilibrium considerations. I show that the equilibrium structure of homophily has empirical power, as it can be used to recover underlying preference parameters. I build a non-cooperative model of network formation, which produces a unique, empirically realistic equilibrium network. Individuals have homophilic preferences and face capacity constraints on the number of links. I develop a novel empirical method, based on the shape of the equilibrium network, which allows for the identification and estimation of the underlying homophilic preferences. I apply this new methodology to race-based choices regarding friendship decisions among American teenagers.
|Date of creation:||25 Jul 2012|
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