Logical Differencing in Dyadic Network Formation Models with Nontransferable Utilities

Document pages: 38 pages

Abstract: This paper considers a semiparametric model of dyadic network formation undernontransferable utilities (NTU). NTU arises frequently in real-world socialinteractions that require bilateral consent, but by its nature induces additivenon-separability. We show how unobserved individual heterogeneity in our modelcan be canceled out without additive separability, using a novel method we calllogical differencing. The key idea is to construct events involving theintersection of two mutually exclusive restrictions on the unobservedheterogeneity, based on multivariate monotonicity. We provide a consistentestimator and analyze its performance via simulation, and apply our method tothe Nyakatoke risk-sharing networks.