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Title: A Structural Model for the Coevolution of Networks and Behavior

Author(s): Chih-Sheng Hsieh, Michael König and Xiaodong Liu

Publication Date: August 2019

Keyword(s): Double Metropolis-Hastings algorithm, Key players, network interactions, R&D collaboration networks, stochastic best-response dynamics, strategic network formation and Unobserved heterogeneity

Programme Area(s): Industrial Organization

Abstract: This paper introduces a structural model for the coevolution of networks and behavior. The microfoundation of our model is a network game where agents adjust actions and network links in a stochastic best-response dynamics with a utility function allowing for both strategic externalities and unobserved heterogeneity. We show the network game admits a potential function and the coevolution process converges to a unique stationary distribution characterized by a Gibbs measure. To bypass the evaluation of the intractable normalizing constant in the Gibbs measure, we adopt the Double Metropolis-Hastings algorithm to sample from the posterior distribution of the structural parameters. To illustrate the empirical relevance of our structural model, we apply it to study R&D investment and collaboration decisions in the chemicals and pharmaceutical industry and find a positive knowledge spillover effect. Finally, our structural model provides a tractable framework for a long-run key player analysis.

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Bibliographic Reference

Hsieh, C, König, M and Liu, X. 2019. 'A Structural Model for the Coevolution of Networks and Behavior'. London, Centre for Economic Policy Research.