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Discrete Choice with Social Interactions I: Theory

  • William A. Brock
  • Steven N. Durlauf

This paper provides an analysis of aggregate behavioral outcomes when individual utility exhibits social interaction effects. We study generalized logistic models of individual choice which incorporate terms reflecting the desire of individuals to conform to the behavior of others in an environment of noncooperative decisionmaking. Laws of large numbers are generated in such environments. Multiplicity of equilibria in these models, which are equivalent to the existence of multiple self-consistent means for average choice behavior, will exist when the social interactions exceed a particular threshold. Local stability of these multiple equilibria is also studied. The properties of the noncooperative economy are contrasted with the properties of an economy in which a social planner determines the set of individual choices. The model is additionally shown to be well suited to explaining a number of empirical phenomena, such as threshold effects in individual behavior, ethnic group fixed effects of income equations, and large cross-group differences in binary choice behavior.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5291.

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Date of creation: Oct 1995
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Publication status: published as Brock, William A. and Steven N. Durlauf. "Discrete Choice With Social Interactions," Review of Economic Studies, 2001, v68(235,Apr), 235-260.
Handle: RePEc:nbr:nberwo:5291
Note: EFG
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  1. Manski, C.F., 1991. "Identification of Endogenous Social Effects: the Reflection Problem," Working papers 9127, Wisconsin Madison - Social Systems.
  2. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  3. Benabou, R., 1994. "Education, Income Distribution, and Growth: The Local Connection," Working papers 94-16, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Bryant, John, 1983. "A Simple Rational Expectations Keynes-Type Model," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 525-28, August.
  5. Glenn C. Loury, 1976. "A Dynamic Theory of Racial Income Differences," Discussion Papers 225, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. W. A. Brock, 1993. "Pathways to Randomness in the Economy: Emergent Nonlinearity and Chaos in Economics and Finance," Working Papers 93-02-006, Santa Fe Institute.
  7. Glaeser, Edward L & Sacerdote, Bruce & Scheinkman, Jose A, 1996. "Crime and Social Interactions," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 507-48, May.
  8. Greif, Avner, 1994. "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 912-50, October.
  9. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
  10. Durlauf, Steven N, 1993. "Nonergodic Economic Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 349-66, April.
  11. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  12. Manski, C.F., 1992. "Identification Problems in the Social Sciences," Working papers 9217, Wisconsin Madison - Social Systems.
  13. George J. Borjas, 1991. "Ethnic Capital and Intergenerational Mobility," NBER Working Papers 3788, National Bureau of Economic Research, Inc.
  14. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October.
  15. Ionnides, Yannis M, 1990. "Trading Uncertainty and Market Form," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 619-38, August.
  16. Case, A.C. & Katz, L.F., 1991. "The Company You Keep: The Effects Of Family And Neighborhood On Disadvantaged Younths," Harvard Institute of Economic Research Working Papers 1555, Harvard - Institute of Economic Research.
  17. Brock, W.A. & Hommes, C.H., 1995. "Rational Routes to Randomness," Working papers 9506, Wisconsin Madison - Social Systems.
  18. Follmer, Hans, 1974. "Random economies with many interacting agents," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 51-62, March.
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