Andreas Dzemski: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O Box 640, SE 40530 GÖTEBORG, Sweden
Abstract: I study a dyadic linking model in which agents form directed links that exhibit homophily and reciprocity. A ﬁxed eﬀect approach accounts for unobserved sources of degree heterogeneity. I consider inference with respect to homophily preferences and a reciprocity parameter, as well as a test of model speciﬁcation. The speciﬁcation test compares observed transitivity to the transitivity predicted by the dyadic linking model. My test statistics are robust to the incidental parameter problem (Neyman and Scott 1948). This is accomplished by using analytical formulas that approximate the eﬀect of the incidental parameter on the bias and the variance of the test statistics. The approximation is justiﬁed under dense large network asymptotics. In an application to favor networks in Indian villages, the model speciﬁcation test detects that the dyadic linking model underestimates the true transitivity of the network.
91 pages, First version: March 2017. Revised: April 2018.
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