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Estimating Spillover Effects with Bilateral Outcomes

This chapter is concerned with the estimation of spillover effects when outcomes arise as a consequence of bilateral interactions instead of from individual actions. In this type of environments, outcomes are generated on links instead of on nodes of a network, like bilateral prices in over-the-counter markets. The author proposes a link-based spatial autoregressive (SAR) model and discusses identification conditions and a two step least square estimation procedure. The author shows analytically that using a standard node-based SAR, which models nodes instead of links’ outcomes, produces misleading results when the data generating process is link-based. The methodology is illustrated using Monte Carlo experiments and real data from an interbank network.