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Homophily in preferences or meetings? Identifying and estimating an iterative network formation model

Author

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  • Luis A. F. Alvarez

  • Cristine Pinto

  • Vladimir Ponczek

Abstract

Is homophily in social and economic networks driven by a taste for homogeneity (preferences) or by a higher probability of meeting individuals with similar attributes (opportunity)? This paper studies identification and estimation of an iterative network game that distinguishes between these two mechanisms. We provide a menu of conditions under which preference- and meeting-related parameters are identified. We then introduce a two-step estimation procedure of these parameters that bypasses direct evaluation of the model likelihood, thus avoiding a computationally intractable task. Our approach enables us to assess the counterfactual effects of changing the meeting protocol between agents. As an application, we study the role of preferences and meetings in shaping classroom friendship networks in Brazil. In a network structure in which homophily due to preferences is stronger than homophily due to meeting opportunities, tracking students may improve welfare. Still, the relative benefit of this policy diminishes over the school semester.

Suggested Citation

  • Luis A. F. Alvarez & Cristine Pinto & Vladimir Ponczek, 2026. "Homophily in preferences or meetings? Identifying and estimating an iterative network formation model," Working Papers, Department of Economics 2026_09, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2026wpecon9
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    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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