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Exclusion bias in empirical social interaction models: causes, consequences and solutions

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  • Bet Caeyers

Abstract

This paper formalises an unproven source of ordinary least squares estimation bias in standard linear-in-means peer effects models. I derive a formula for the magnitude of the bias and discuss its underlying parameters. I show the conditions under which the bias is aggravated in models adding cluster fixed effects and demonstrate how it affects inference and interpretation of estimation results. Further, I reveal that two-stage least squares (2SLS) estimation strategies eliminate the bias and provide illustrative simulations. The results may explain some counter-intuitive findings in the social interaction literature, such as the observation of OLS estimates of endogenous peer effects that are larger than their 2SLS counterparts.

Suggested Citation

  • Bet Caeyers, 2014. "Exclusion bias in empirical social interaction models: causes, consequences and solutions," CSAE Working Paper Series 2014-05, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2014-05
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    References listed on IDEAS

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    Cited by:

    1. Bet Caeyers, 2014. "Peer effects in development programme awareness of vulnerable groups in rural Tanzania," CSAE Working Paper Series 2014-11, Centre for the Study of African Economies, University of Oxford.
    2. repec:oxf:wpaper:wps/2014-11 is not listed on IDEAS

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