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Peer effects in consumption in India: An instrumental variables approach using negative idiosyncratic shocks

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  • Roychowdhury, Punarjit

Abstract

This paper examines peer effects in consumption in context of a less developed country. Specifically, the question that I seek to answer is whether consumption expenditure of a household is influenced by that of its peers in a less developed country. To examine this question, I use newly available household level data from India. I define a household’s peer group as other households living in its village/neighborhood. In assessing the influences of peers in this context, there are two key empirical challenges including shared group-level unobservables, and simultaneity of peer influences. I address these issues by using an instrumental variables/fixed effects approach that compares households in the same district but different villages/neighborhoods who are thus exposed to different sets of peers. In particular, I use plausibly exogenous variation in idiosyncratic expenditure shocks – which are accidental and negative in nature – faced by peers as instruments for peers’ consumption expenditure. Preferred specification suggests that a one standard deviation increase in average consumption expenditure of a household’s peers causes the household’s own consumption expenditure to increase by 0.42 standard deviations. Falsification tests and robustness checks support the validity of my results. My findings suggest that policies that influence a household’s consumption will also affect the consumption of the household’s peers through social interactions. This implies traditional analyses of consumption intervention programs that do not take into account such spillover effects will understate the total social impact of the programs, and hence lead to inaccurate evaluation of cost-effectiveness of such programs.

Suggested Citation

  • Roychowdhury, Punarjit, 2019. "Peer effects in consumption in India: An instrumental variables approach using negative idiosyncratic shocks," World Development, Elsevier, vol. 114(C), pages 122-137.
  • Handle: RePEc:eee:wdevel:v:114:y:2019:i:c:p:122-137
    DOI: 10.1016/j.worlddev.2018.09.028
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    3. Charu Grover & Sangeeta Bansal, 2021. "Effect of green network and emission tax on consumer choice under discrete continuous framework," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 23(4), pages 641-666, October.
    4. Biswas, Shreya & Das, Upasak, 2022. "Adding fuel to human capital: Exploring the educational effects of cooking fuel choice from rural India," Energy Economics, Elsevier, vol. 105(C).
    5. Marco Baudino, 2020. "Environmental Engel curves in Italy: A spatial econometric investigation," Papers in Regional Science, Wiley Blackwell, vol. 99(4), pages 999-1018, August.
    6. Hamid Beladi & Sugata Marjit & Reza Oladi & Lei Yang, 2021. "Malnutrition in the shadow of economic growth," Review of Development Economics, Wiley Blackwell, vol. 25(1), pages 500-514, February.

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    More about this item

    Keywords

    Consumption; Endogeneity; India; Instrumental variables; Peer effects; Status-seeking behavior;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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