Abstract
I look at the equilibrium effects of homophily in network formation games having positive externalities. I show that very weak preferences for network effects (such as a preference for being part of a clique) may result in very high levels of homophily at equilibrium. I present an empirical procedure that allows an evaluation of the role of network effects on the observed level of homophily in the data. I apply my method to the formation of friendship networks in the USA. I show that network effects are small and have a negligible contribution to the observed racial homophily in friendship networks.
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