Let \([n]\equiv\{1,2,\ldots,n\}\) be a set of individuals. Suppose I have data \(\{(y_{ij},x_{ij}):i,j\in[n]\ \text{with}\ i<j\}\) on pairs in \([n]\) generated by the process $$\renewcommand{\epsilon}{\varepsilon} y_{ij}=x_{ij}\beta+\epsilon_{ij},$$ where \(x_{ij}\) is a row vector of pair \(\{i,j\}\)'s characteristics, \(\beta\) is a vector of coefficients to be estimated, and \(\epsilon_{ij}\) is a random error term with zero mean and zero correlation with the \(x_{ij}\). For example, \([n]\) could be the nodes in a network, \(x_{ij}\) the dimensions along which nodes \(i\) and \(j\) interact, and \(y_{ij}\) the outcome of such interaction.

We can rewrite the data-generating process (DGP) in matrix form as $$y=X\beta+\epsilon,$$ where \(y\) is the vector of outcomes, \(X\) is the design matrix, and \(\epsilon\) is the vector of errors. Here \(X\) has $$N\equiv\frac{n(n-1)}{2}$$ rows, each corresponding to a(n unordered) pair of individuals in \([n]\). Since the \(x_{ij}\) and \(\epsilon_{ij}\) are uncorrelated, the ordinary least squares estimator $$\hat\beta=(X^T\!X)^{-1}X^T\!y$$ of \(\beta\) is unbiased. However, \(\hat\beta\) may not be efficient because the errors \(\epsilon_{ij}\) may be correlated. For example, if $$\epsilon_{ij}=u_i+u_j+v_{ij}$$ with \(u_i\), \(u_j\), and \(v_{ij}\) independent then $$\DeclareMathOperator{\Cov}{Cov} \DeclareMathOperator{\Var}{Var} \Cov(\epsilon_{ij},\epsilon_{jk})=\Var(u_j).$$ Intuitively, the pairs \(\{i,j\}\) and \(\{j,k\}\) are linked through individual \(j\), and so any errors specific to that individual affect the errors for both pairs. Consequently, the homoskedastic estimator $$\widehat{\Var}_{\text{Hom.}}(\hat\beta)=\hat\sigma^2(X^T\!X)^{-1}$$ with $$\hat\sigma^2=\frac{1}{N}\sum_{ij}\hat\epsilon_{ij}^2$$ and $$\hat\epsilon_{ij}=y_{ij}-x_{ij}\hat\beta$$ will typically under-estimate the variance in \(\hat\beta\) by failing to account for linked pairs having dependent errors.

So, how can we account for such dependence? Consider the “sandwich” form $$\Var(\hat\beta)=BMB$$ of the (co)variance matrix for \(\hat\beta\), where \(B=(X^T\!X)^{-1}\) is the “bread” matrix and \(M=X^T\!VX\) is the “meat” matrix with \(V=\Var(\epsilon)\) the error (co)variance matrix. We need to estimate \(M\) because we don’t observe the \(\epsilon_{ij}\). Indexing pairs by \(p\), the homoskedastic estimator defined above uses $$\begin{align} \hat{M}_{\text{Hom.}} &= \hat\sigma^2X^T\!X \\ &= \hat\sigma^2\sum_{p=1}^Nx_p^T\!x_p, \end{align}$$ which assumes all errors have equal variance. In contrast, White (1980) suggests using $$\begin{align} \hat{M}_{\text{White}} &= X^T\!\mathrm{diag}\left(\hat\epsilon_p^2\right)X \\ &= \sum_{p=1}^N\hat\epsilon_p^2x_p^T\!x_p, \end{align}$$ which allows for unequal error variances (heteroskedasticity). But neither \(\hat{M}_{\text{Hom.}}\) nor \(\hat{M}_{\text{White}}\) allow for dyadic dependence among the errors. To that end, Aronow et al. (2017) suggest augmenting White’s estimator via $$\begin{align} \hat{M}_{\text{Aronow}} &= \hat{M}_{\text{White}}+\sum_{p=1}^N\sum_{q\in\mathcal{D}(p)}\hat\epsilon_p\hat\epsilon_qx_p^T\!x_q, \end{align}$$ where \(\mathcal{D}(p)\) is the set of pairs \(q\not=p\) linked to \(p\) by a shared individual. We can express \(\hat{M}_{\text{Aronow}}\) in matrix form as $$\hat{M}_{\text{Aronow}}=X^T\!\left(D\odot\hat\epsilon\hat\epsilon^T\!\right)X,$$ where \(D=(d_{pq})\) is the dyadic dependence matrix with $$d_{pq}=\begin{cases} 1 & \text{if pairs}\ p\ \text{and}\ q\ \text{are linked}\\ 0 & \text{otherwise}, \end{cases}$$ and where \(\odot\) denotes element-wise multiplication. Aronow et al. show that, under mild conditions, \(B\hat{M}_{\text{Aronow}}B\) is a consistent estimator for \(\Var(\hat\beta)\) when the data exhibit dyadic dependence.1

To see Aronow et al.‘s estimator in action, suppose the DGP is given by the system $$\begin{align} y_{ij} &= \beta x_{ij}+\epsilon_{ij} \\ x_{ij} &= z_i+z_j \\ \epsilon_{ij} &= u_i+u_j+v_{ij}, \end{align}$$ where \(z_i\), \(z_j\), \(u_i\), \(u_j\) and \(v_{ij}\) are iid standard normal, and \(\beta=1\) is the (scalar) coefficient to be estimated. Both the \(x_{ij}\) and the \(\epsilon_{ij}\) exhibit dyadic dependence, so we expect the homoskedastic and White estimators to under-estimate the true variance in \(\hat\beta\). Indeed, the box plots below show that Aronow et al.‘s estimator is less biased than the homoskedastic and White estimators, and gets more accurate as the number of individuals \(n\) grows.

Aronow et al.‘s estimator can also be applied to generalized linear models. For example, suppose $$y_{ij}=\begin{cases} 1 & \text{if nodes}\ i\ \text{and}\ j\ \text{are adjacent} \\ 0 & \text{otherwise} \end{cases}$$ is an indicator for the event in which nodes \(i\) and \(j\) are adjacent in a network. We can model the link formation process as $$\Pr(y_{ij}=1)=\Lambda^{-1}(x_{ij}\beta+\epsilon_{ij}),$$ where \(\Lambda(x)\equiv\log(x/(1-x))\) is the logit link function. The logistic regression estimate \(\hat\beta\) of \(\beta\) reveals how the observable characteristics \(x_{ij}\) of nodes \(i\) and \(j\) determine their probability of being adjacent. We can estimate the variance of \(\hat\beta\) consistently by letting \(\hat{P}_{ij}=\Lambda^{-1}(x_{ij}\hat\beta)\) be the predicted probability for pair \(\{i,j\}\), replacing the bread matrix \(B=(X^T\!X)^{-1}\) with $$\hat{B}=\left(X^T\mathrm{diag}\left(\hat{P}_{ij}\left(1-\hat{P}_{ij}\right)\right)X\right)^{-1},$$ and computing \(\hat{B}\hat{M}_{\text{Aronow}}\hat{B}\). My co-authors and I use this approach in “Research Funding and Collaboration:” we estimate how grant proposal outcomes determine the probability with which pairs of researchers co-author, and we compare \(\hat\sigma^2\hat{B}\) and \(\hat{B}\hat{M}_{\text{Aronow}}\hat{B}\) to show that our inferences are robust to dyadic dependence.

  1. Fafchamps and Gubert (2007) describe a similar variance estimator to Aronow et al. but do not establish its consistency. ↩︎