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Revealed Preference Tests of Network Formation Models

Author

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  • Khai Xiang Chiong

    () (Division of the Humanities and Social Sciences, California Institute of Technology)

Abstract

This paper proposes a revealed preference test of network formation models. Specifically, I consider network formation models where agents are (1) strategic, (2) externalities are confined to within an agent’s k-neighborhood, where k can be varied. I show that this model can be tested using observation of a single network. I then derive necessary and sufficient condition under which the observed network is consistent with our strategic models of network formation. This non-parametric test takes the form of an algorithm involving the computation of color-preserving automorphisms of graphs. Building on the theoretical result, the test is implemented to calculate its’ statistical power and to the Banerjee et al. (2012)’s social network data.

Suggested Citation

  • Khai Xiang Chiong, 2013. "Revealed Preference Tests of Network Formation Models," Working Papers 13-23, NET Institute.
  • Handle: RePEc:net:wpaper:1323
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    File URL: http://www.netinst.org/Chiong_13-23
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    Keywords

    Revealed preference; Networks formation; Social networks; Pair- wise stability; Model testing; Testable implications; Graph automorphism;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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