Homophily, or the fact that similar individuals tend to interact with each other, is a prominent feature of economic and social networks. I show that the equilibrium structure of homophily has empirical power. I build a strategic model of network formation, which produces a unique equilibrium network. Individuals have homophilic preferences and face capacity constraints on the number of links. I develop a novel empirical method, based on the shape of the equilibrium network, which allows for the identification and estimation of the underlying homophilic preferences. I apply this new methodology to the formation of friendship networks.
