Traditionally, econometric research on social interaction effects has used fairly large social groups (schools, Census tracts, etc.). However, new data which describes the behavior of much smaller peer groups is becoming available. This paper analyzes the behavior of "small neighborhoods" in the presence of social interaction effects, and finds results which are very different from the existing "large neighborhood" literature (see Brock and Durlauf 2000). First, small neighborhoods will have multiple equilibria for a much larger range of parameter values. Second, the standard estimation procedure, while consistent for large neighborhoods, is inconsistent for small neighborhoods. A consistent indirect inference procedure is developed and applied to data on youth smoking. The results indicate the standard method produces a substantial overstatement in the strength of peer influence.
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|Date of creation:||01 Apr 2001|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html|
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