Peer vs. Network Effects: Microfoundations, Identification, and Beyond

This paper reviews the theoretical and empirical foundations of peer and network effects, aiming to bridge insights from both literatures. We first examine the main identification challenges in linear-in-means models-reflection, correlated effects, and sorting-and show how introducing explicit network structures can help address them. We also review reduced-form strategies based on within-school cohort composition, exposure to peers' shocks, random assignment, and exogenous variation in network links. The analysis then develops the microfoundations of peer effects through linear-quadratic network games, linking equilibrium behavior to network centrality and highlighting the role of key players. Using this framework, we discuss how structural models of network formation and individual effort choices can resolve endogeneity concerns. The paper concludes with recent advances on non-linear and multiplex interactions, where individuals respond to specific peers and operate across multiple, interdependent layers.