infonet-economy

We analyze binary choice models in communication networks, in which both, the formation of links in the network as well as the action choices are endogenous. We provide a complete characterization of the equilibrium action choices and networks, where agents choose their strategies – actions and links – according to a perturbed best response update rule. We show that a threshold exists in the linking cost and the conformity parameter, giving rise to either a sparse or a densely connected communication network. Moreover, we show how the theoretical model can be efficiently estimated using cross sectional data on agents choices and their network of interactions.