Spatial Modeling Approach for Dynamic Network Formation and Interactions

This study primarily seeks to answer the following question: How do social networks evolve over time and affect individual economic activity? To provide an adequate empirical tool to answer this question, we propose a new modeling approach for longitudinal data of networks and activity outcomes. The key features of our model are the inclusion of dynamic effects and the use of time-varying latent variables to determine unobserved individual traits in network formation and activity interactions. The proposed model combines two well-known models in the field: latent space model for dynamic network formation and spatial dynamic panel data model for network interactions. This combination reflects real situations, where network links and activity outcomes are interdependent and jointly influenced by unobserved individual traits. Moreover, this combination enables us to (1) manage the endogenous selection issue inherited in network interaction studies, and (2) investigate the effect of homophily and individual heterogeneity in network formation. We develop a Bayesian Markov chain Monte Carlo sampling approach to estimate the model. We also provide a Monte Carlo experiment to analyze the performance of our estimation method and apply the model to a longitudinal student network data in Taiwan to study the friendship network formation and peer effect on academic performance. Supplementary materials for this article are available online.