Nonparametric identification in index models of link formation

Abstract

We consider a dyadic link formation model with a homophily effect index and a degree heterogeneity index. We provide nonparametric identification results for the potentially nonparametric homophily effect function, the realizations of unobserved individual fixed effects and the unknown distribution of idiosyncratic shocks, up to normalization. We propose a novel form of scale normalization on an arbitrary interquantile range, which is not only theoretically general but also proves particularly convenient for the identification analysis. We then use an inductive “in-fill and out-expansion” algorithm to establish our main results.