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Binary Choice Models with Social Network under Heterogeneous Rational Expectations


  • Lung-fei Lee

    (Ohio State University)

  • Ji Li

    (Capital One)

  • Xu Lin

    (Wayne State University)


This paper extends Brock and Durlauf's (2001a, 2001b) binary choice complete network (or group interaction) model with homogeneous rational expectations to a general network model with heterogeneous rational expectations. In our model, individuals will form expectations regarding peers' behaviors taking into account their characteristics. Endogenous, contextual, and correlated effects are all identifiable. Conditions for unique equilibrium are established. For a complete network with heterogeneous rational expectations, multiple equilibria can be characterized by an aggregate scalar index. The empirical results on adolescents' smoking behaviors show significant endogenous and contextual effects, even after controlling for school-grade random effects and school fixed effects. © 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Lung-fei Lee & Ji Li & Xu Lin, 2014. "Binary Choice Models with Social Network under Heterogeneous Rational Expectations," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 402-417, July.
  • Handle: RePEc:tpr:restat:v:96:y:2014:i:3:p:402-417

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    More about this item


    Discrete choice; social interaction; rational expectation; heterogeneity; smoking; teenagers;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • I10 - Health, Education, and Welfare - - Health - - - General
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth


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