A pairwise strategic network formation model with group heterogeneity: With an application to international travel

Abstract This study considers a network formation model in which each dyad of agents strategically determines the link status. Our model allows the agents to have unobserved group heterogeneity in the propensity of link formation. For the model estimation, we propose a three-step maximum likelihood method, in which the latent group structure is estimated using the binary segmentation algorithm in the second step. As an empirical illustration, we focus on the network data of international visa-free travels. The results indicate the presence of significant strategic complementarity and a certain level of degree heterogeneity in the network formation behavior.