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Peer Effects in Binary Outcomes: Strategic Complementarity and Taste for Conformity With Endogenous Networks

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  • Mathieu Lambotte

Abstract

This paper introduces a generalized model of peer effects for binary outcomes, based on a network game that accounts for strategic complementarity (influence of the number of peers that select the same action) and conformity to social norms (penalizing deviations from the average peers' action). We derive conditions for a unique Bayesian Nash equilibrium under rational expectations about peers' behavior. Unobserved individual heterogeneity affecting network formation and peer effects is addressed nonparametrically using a control function nested pseudo likelihood estimator, whose asymptotic properties are established. The model is applied to microfinance participation in India.

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  • Mathieu Lambotte, 2025. "Peer Effects in Binary Outcomes: Strategic Complementarity and Taste for Conformity With Endogenous Networks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 40(6), pages 608-626, September.
    • Handle: RePEc:wly:japmet:v:40:y:2025:i:6:p:608-626
    DOI: 10.1002/jae.3128
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