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

  • Bet Caeyers
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    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.

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    Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2014-05.

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    Date of creation: 2014
    Date of revision:
    Handle: RePEc:csa:wpaper:2014-05
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    4. Duflo, Esther & Dupas, Pascaline & Kremer, Michael, 2008. "Peer Effects, Teacher Incentives, and the Impact of Tracking: Evidence from a Randomized Evaluation in Kenya," CEPR Discussion Papers 7043, C.E.P.R. Discussion Papers.
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    7. Yann Bramoullé & Habiba Djebbari & Bernard Fortin, 2007. "Identification of Peer Effects through Social Networks," Cahiers de recherche 0705, CIRPEE.
    8. Lee, Lung-fei, 2007. "Identification and estimation of econometric models with group interactions, contextual factors and fixed effects," Journal of Econometrics, Elsevier, vol. 140(2), pages 333-374, October.
    9. William A. Brock & Steven N. Durlauf, 2009. "Adoption Curves and Social Interactions," NBER Working Papers 15065, National Bureau of Economic Research, Inc.
    10. Duflo, Esther & Saez, Emmanuel, 2002. "Participation and investment decisions in a retirement plan: the influence of colleagues' choices," Journal of Public Economics, Elsevier, vol. 85(1), pages 121-148, July.
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    12. Jonathan Guryan & Kory Kroft & Matthew J. Notowidigdo, 2009. "Peer Effects in the Workplace: Evidence from Random Groupings in Professional Golf Tournaments," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 34-68, October.
    13. Gioia De Melo, 2011. "Peer effects identified through social networks. Evidence from Uruguayan schools," Department of Economics University of Siena 627, Department of Economics, University of Siena.
    14. David S. Lyle, 2007. "Estimating and Interpreting Peer and Role Model Effects from Randomly Assigned Social Groups at West Point," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 289-299, May.
    15. Jacob M. Markman & Eric A. Hanushek & John F. Kain & Steven G. Rivkin, 2003. "Does peer ability affect student achievement?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(5), pages 527-544.
    16. Bruce Sacerdote, 2000. "Peer Effects with Random Assignment: Results for Dartmouth Roommates," NBER Working Papers 7469, National Bureau of Economic Research, Inc.
    17. Lawrence E. Blume & William A. Brock & Steven N. Durlauf & Yannis M. Ioannides, 2010. "Identification of Social Interactions," Discussion Papers Series, Department of Economics, Tufts University 0754, Department of Economics, Tufts University.
    18. Bryan S. Graham, 2008. "Identifying Social Interactions Through Conditional Variance Restrictions," Econometrica, Econometric Society, vol. 76(3), pages 643-660, 05.
    19. Manski, C.F., 1991. "Identification of Endogenous Social Effects: the Reflection Problem," Working papers 9127, Wisconsin Madison - Social Systems.
    20. Giacomo De Giorgi & Michele Pellizzari & Silvia Redaelli, 2010. "Identification of Social Interactions through Partially Overlapping Peer Groups," American Economic Journal: Applied Economics, American Economic Association, vol. 2(2), pages 241-75, April.
    21. David S. Lyle, 2009. "The Effects of Peer Group Heterogeneity on the Production of Human Capital at West Point," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 69-84, October.
    22. Graham, Bryan S. & Hahn, Jinyong, 2005. "Identification and estimation of the linear-in-means model of social interactions," Economics Letters, Elsevier, vol. 88(1), pages 1-6, July.
    23. Jason Fletcher, 2012. "Peer influences on adolescent alcohol consumption: evidence using an instrumental variables/fixed effect approach," Journal of Population Economics, Springer, vol. 25(4), pages 1265-1286, October.
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