Social interactions and social preferences in social networks

We study social interactions when individuals hold altruistic preferences in social networks. Rich network features can be captured in the resulting best response function. The inward network links provide unique information for identifying the altruism effect. We demonstrate that the often ignored altruism is another serious confounding factor of peer effects. Specifically, the estimates of peer effects are approximately 36% smaller after taking into account social preferences. Furthermore, we could identify two types of effects caused by peers' outcomes: the spillover effects and the externality effects, which is impossible in a conventional social interactions model based on the self‐interest hypothesis.