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Peer Effects in Consideration and Preferences

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  • Nail Kashaev
  • Natalia Lazzati
  • Ruli Xiao

Abstract

We develop a general model of discrete choice that incorporates peer effects in preferences and consideration sets. We characterize the equilibrium behavior and establish conditions under which all parts of the model can be recovered from a sequence of choices. We allow peers to affect only preferences, only consideration, or both. We show that these peer-effect mechanisms have different behavioral implications in the data. This allows us to recover the set and the type of connections between the agents in the network. We then use this information to recover the preferences and the consideration mechanisms of each agent. These nonparametric identification results allow for general forms of heterogeneity across agents and do not rely on the variation of either exogenous covariates or the set of available options (menus). We apply our results to model expansion decisions by coffee chains and find evidence of limited consideration. We simulate counterfactual predictions and show how limited consideration slows down competition.

Suggested Citation

  • Nail Kashaev & Natalia Lazzati & Ruli Xiao, 2023. "Peer Effects in Consideration and Preferences," Papers 2310.12272, arXiv.org, revised Jan 2024.
    • Handle: RePEc:arx:papers:2310.12272
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    References listed on IDEAS

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