Dynamic Formation of Directed Firm Networks

This paper rationalizes …rm’s motivation to build directed links with each other and formalizes the dynamic formation process that generates the observed network structure in the citation network. Random meeting of customers and …rms in the di¤erentiated goods market are unlikely to result in perfect match between demand and supply, but the …rm can earn commission fee by redirecting the customer to another …rm who are able to serve the demand, only if these two …rms are connected by social linkage. Therefore each …rm wants to know more …rms, so that they can earn more commission fee. On the other hand, every …rm also desires to be known by more other …rms in order to gain more redirected customers. The model extends the dynamic formation of non-directed network model in Jackson and Rogers (2007) into directed network and results in various structure features that exhibit in actual directed networks. I then estimate the model’s parameters using …rm citation panel data from the NBER Patent Citation Database. Using the estimated parameters I simulate the model to generate arti…cial sectoral citation networks and show that the simulated network structure is similar to the network structures observed in the data. Keyword: directed network, dynamic network formation, power-law, patent citation JEL Classi…cation: D85 Z13