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Testing for Externalities in Network Formation Using Simulation

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  • Bryan S. Graham
  • Andrin Pelican

Abstract

We discuss a simplified version of the testing problem considered by Pelican and Graham (2019): testing for interdependencies in preferences over links among N (possibly heterogeneous) agents in a network. We describe an exact test which conditions on a sufficient statistic for the nuisance parameter characterizing any agent-level heterogeneity. Employing an algorithm due to Blitzstein and Diaconis (2011), we show how to simulate the null distribution of the test statistic in order to estimate critical values and/or p-values. We illustrate our methods using the Nyakatoke risk-sharing network. We find that the transitivity of the Nyakatoke network far exceeds what can be explained by degree heterogeneity across households alone.

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  • Bryan S. Graham & Andrin Pelican, 2019. "Testing for Externalities in Network Formation Using Simulation," Papers 1908.00099, arXiv.org.
    • Handle: RePEc:arx:papers:1908.00099
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    References listed on IDEAS

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    1. Francis Bloch & Matthew Jackson, 2006. "Definitions of equilibrium in network formation games," International Journal of Game Theory, Springer;Game Theory Society, vol. 34(3), pages 305-318, October.
    2. Bloch, Francis & Jackson, Matthew O., 2007. "The formation of networks with transfers among players," Journal of Economic Theory, Elsevier, vol. 133(1), pages 83-110, March.
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