Estimating Causal Installed-Base Effects: A Bias-Correction Approach
AbstractNew empirical models of consumer demand that incorporate social preferences, observational learning, word-of-mouth or network effects have the feature that the adoption of others in the reference group - the Òinstalled-baseÓ - has a causal effect on current adoption behavior. Estimation of such causal installed-base effects is challenging due to the potential for spurious correlation between the adoption of agents, arising from endogenous assortive matching into social groups (or homophily) and from the existence of unobservables across agents that are correlated. In the absence of experimental variation, the preferred solution is to control for these using a rich specification of fixed-effects, which is feasible with panel data. We show that fixed-effects estimators of this sort are inconsistent in the presence of installed-base effects; in our simulations, random-effects specifications perform even worse. Our analysis reveals the tension faced by the applied empiricist in this area: a rich control for unobservables increases the credibility of the reported causal effects, but the incorporation of these controls introduces biases of a new kind in this class of models. We present two solutions: an instrumental variable approach, and a new bias-correction approach, both of which deliver consistent estimates of causal installed-base effects. The bias-correction approach is tractable in this context because we are able to exploit the structure of the problem to solve analytically for the asymptotic bias of the installed-base estimator, and to incorporate it into the estimation routine. Our approach has implications for the measurement of social effects using non-experimental data, and for measuring marketing-mix effects in the presence of state-dependence in demand, more generally. Our empirical application to the adoption of the Toyota Prius Hybrid in California reveals evidence for social influence in diffusion, and demonstrates the importance of incorporating proper controls for the biases we identify.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 11-22.
Length: 51 pages
Date of creation: Sep 2011
Date of revision:
Contact details of provider:
Web page: http://www.NETinst.org/
Contagion; Social Interactions; Installed-base Effects; Homophily; Correlated Unobservables; Diffusion; Product Adoption; Toyota Prius;
Other versions of this item:
- Narayanan, Sridhar & Nair, Harikesh S., 2011. "Estimating Causal Installed-Base Effects: A Bias-Correction Approach," Research Papers 2076, Stanford University, Graduate School of Business.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- L00 - Industrial Organization - - General - - - General
- M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mohammad Arzaghi & J. Vernon Henderson, 2008.
"Networking off Madison Avenue,"
Review of Economic Studies,
Oxford University Press, vol. 75(4), pages 1011-1038.
- Hsiao,Cheng, 2003.
"Analysis of Panel Data,"
Cambridge University Press, number 9780521522717, October.
- Topa, Giorgio, 2001. "Social Interactions, Local Spillovers and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 261-95, April.
- Kiviet, Jan F., 1995.
"On bias, inconsistency, and efficiency of various estimators in dynamic panel data models,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 53-78, July.
- Tom Doan, . "LSDVC: RATS procedure to estimate a dynamic FE model with correction for bias," Statistical Software Components RTS00111, Boston College Department of Economics.
- repec:bla:restud:v:75:y:2008:i:4:p:1011-1038 is not listed on IDEAS
- Reto Hoffstetter & Harikesh Nair & Scott Shriver & Klaus Miller, 2009.
"Social Ties and User Generated Content: Evidence from an Online Social Network,"
09-28, NET Institute, revised Nov 2009.
- Shriver, Scott K. & Nair, Harikesh S. & Hofstetter, Reto, 2011. "Social Ties and User-Generated Content: Evidence from an Online Social Network," Research Papers 2083, Stanford University, Graduate School of Business.
- John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian & Katherine L. Milkman, 2011. "The Effect of Providing Peer Information on Retirement Savings Decisions," NBER Working Papers 17345, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides).
If references are entirely missing, you can add them using this form.