DP13161 Network Formation with Local Complements and Global Substitutes: The Case of R&D Networks

Author(s): Chih-Sheng Hsieh, Michael König, Xiaodong Liu
Publication Date: September 2018
Keyword(s): key player, mergers and acquisitions, network formation, peer effects, Subsidies, technology spillovers
JEL(s): C11, C63, C73, D83, L22
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13161

We introduce a stochastic network formation model where agents choose both actions and links. Neighbors in the network benefit from each other's action levels through local complementarities and there exists a global interaction effect reflecting a strategic substitutability in actions. We provide a complete equilibrium characterization in the form of a Gibbs measure, and show that the model is consistent with empirically observed networks. We then use our equilibrium characterization to show that the model can be conveniently estimated even for large networks. The policy relevance is demonstrated with examples of firm exit, mergers and subsidies in R&D collaboration networks.