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Discrete Choice with Social Interactions and Endogenous Memberships

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  • Giulio Zanella

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    Abstract

    This paper tackles the issue of self-selection in social interactions models. I develop a theory of sorting and behavior, when the latter is subject to social influences, extending the model developed by Brock and Durlauf (2001a, 2003) to allow for equilibrium group formation. Individuals choose a group, and a behavior subject to an endogenous social effect. The latter turns out to be a segregating force, and stable equilibria are stratified. The sorting process may induce, inefficiently, multiple behavioral equilibria. Such a theory serves as a means to solve identification and selection problems that may undermine the empirical detection of social effects on individual behavior. I exploit the theoretical model to build a nonlinear (in the social effect) selection correction term. Such a term allows identification, and solves the selection problem that arises when individuals can choose the group whose effect the researcher is trying to disentangle. The resulting econometric model, although relying on strict parametric assumptions, indicates a viable alternative when reliable instrumental variables are not available, or randomized experiments not possible.

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    Bibliographic Info

    Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 442.

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    Date of creation: Nov 2004
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    Handle: RePEc:usi:wpaper:442

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    Related research

    Keywords: social interactions; neighborhood effects; sorting; self-selection; nested logit; identification of social effects;

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    1. Glaeser, Edward L & Sacerdote, Bruce & Scheinkman, Jose A, 1996. "Crime and Social Interactions," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 507-48, May.
    2. Herriges, Joseph A. & Kling, Catherine L., 1996. "Testing the consistency of nested logit models with utility maximization," Economics Letters, Elsevier, vol. 50(1), pages 33-39, January.
    3. Durlauf, Steven N, 1996. " A Theory of Persistent Income Inequality," Journal of Economic Growth, Springer, vol. 1(1), pages 75-93, March.
    4. Manski, C.F., 1990. "The Selection Problem," Working papers 90-12, Wisconsin Madison - Social Systems.
    5. Falk, Armin & Ichino, Andrea, 2003. "Clean Evidence on Peer Pressure," IZA Discussion Papers 732, Institute for the Study of Labor (IZA).
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    7. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
    8. Larry Samuelson, 2004. "Information-Based Relative Consumption Effects," Econometrica, Econometric Society, vol. 72(1), pages 93-118, 01.
    9. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, October.
    10. Yannis M. Ioannides & Jeffrey E. Zabel, 2002. "Interaction, Neighborhood Selection and Housing Demand," Discussion Papers Series, Department of Economics, Tufts University 0208, Department of Economics, Tufts University.
    11. Edward L. Glaeser & Jose A. Scheinkman, 1999. "Measuring Social Interactions," Harvard Institute of Economic Research Working Papers 1878, Harvard - Institute of Economic Research.
    12. William Brock & Steven N. Durlauf, 2000. "Interactions-Based Models," NBER Technical Working Papers 0258, National Bureau of Economic Research, Inc.
    13. William A. Brock & Steven N. Durlauf, 2003. "Multinomial Choice with Social Interactions," NBER Technical Working Papers 0288, National Bureau of Economic Research, Inc.
    14. Brock,W.A. & Durlauf,S.N., 2004. "Identification of binary choice models with social interactions," Working papers 2, Wisconsin Madison - Social Systems.
    15. de Bartolome, Charles A M, 1990. "Equilibrium and Inefficiency in a Community Model with Peer Group Effects," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 110-33, February.
    16. Borsch-Supan, Axel, 1990. "On the compatibility of nested logit models with utility maximization," Journal of Econometrics, Elsevier, vol. 43(3), pages 373-388, March.
    17. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
    18. Patrick Bayer & Robert McMillan & Kim Rueben, 2004. "An Equilibrium Model of Sorting in an Urban Housing Market," NBER Working Papers 10865, National Bureau of Economic Research, Inc.
    19. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
    20. Evans, William N & Oates, Wallace E & Schwab, Robert M, 1992. "Measuring Peer Group Effects: A Study of Teenage Behavior," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 966-91, October.
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    22. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    23. repec:att:wimass:9217 is not listed on IDEAS
    24. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
    25. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
    26. Epple, Dennis & Platt, Glenn J., 1998. "Equilibrium and Local Redistribution in an Urban Economy when Households Differ in both Preferences and Incomes," Journal of Urban Economics, Elsevier, vol. 43(1), pages 23-51, January.
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    Cited by:
    1. Ethan Cohen-Cole & Burcu Duygan-Bump, 2008. "Household bankruptcy decision: the role of social stigma vs. information sharing," Risk and Policy Analysis Unit Working Paper QAU08-6, Federal Reserve Bank of Boston.

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