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“Linear Regression with Centrality Measures”
Abstract:
This paper studies the properties of linear regression on centrality measures when network data is sparse — that is, when there are many more agents than links per agent — and when they are measured with error. We make three contributions in this setting: (1) We show that OLS estimators can become inconsistent under sparsity and characterize the threshold at which this occurs, with and without measurement error. This threshold depends on the centrality measure used. Specifically, regression on eigenvector is less robust to sparsity than on degree and diffusion. (2) We develop distributional theory for OLS estimators under measurement error and sparsity, finding that OLS estimators are subject to asymptotic bias even when they are consistent. Moreover, bias can be large relative to their variances, so that bias correction is necessary for inference. (3) We propose novel bias correction and inference methods for OLS with sparse noisy networks. Simulation evidence suggests that our theory and methods perform well, particularly in settings where the usual OLS estimators and heteroskedasticity-consistent/robust t-tests are deficient. Finally, we demonstrate the utility of our results in an application inspired by De Weerdt and Dercon (2006), in which we study the relationship between consumption smoothing and informal insurance in Nyakatoke, Tanzania.