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Discrete Choice with Social Interactions and Endogenous Memberships

  • Giulio Zanella

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    This paper tackles the issue of self-selection in social interactions models. I develop a theory of sorting and behavior, when the latter is subject to social influences, extending the model developed by Brock and Durlauf (2001a, 2003) to allow for equilibrium group formation. Individuals choose a group, and a behavior subject to an endogenous social effect. The latter turns out to be a segregating force, and stable equilibria are stratified. The sorting process may induce, inefficiently, multiple behavioral equilibria. Such a theory serves as a means to solve identification and selection problems that may undermine the empirical detection of social effects on individual behavior. I exploit the theoretical model to build a nonlinear (in the social effect) selection correction term. Such a term allows identification, and solves the selection problem that arises when individuals can choose the group whose effect the researcher is trying to disentangle. The resulting econometric model, although relying on strict parametric assumptions, indicates a viable alternative when reliable instrumental variables are not available, or randomized experiments not possible.

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    File URL: http://www.econ-pol.unisi.it/quaderni/442.pdf
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    Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 442.

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    Date of creation: Nov 2004
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    Handle: RePEc:usi:wpaper:442
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    1. Brock,W.A. & Durlauf,S.N., 2000. "Discrete choice with social interactions," Working papers 7, Wisconsin Madison - Social Systems.
    2. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387.
    3. Edward E. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995. "Crime and Social Interactions," Harvard Institute of Economic Research Working Papers 1738, Harvard - Institute of Economic Research.
    4. Brock,W.A. & Durlauf,S.N. & West,K.D., 2003. "Policy evaluation in uncertain economic environments," Working papers 15, Wisconsin Madison - Social Systems.
    5. repec:att:wimass:9217 is not listed on IDEAS
    6. Durlauf, Steven N, 1996. " A Theory of Persistent Income Inequality," Journal of Economic Growth, Springer, vol. 1(1), pages 75-93, March.
    7. Larry Samuelson, 2004. "Information-Based Relative Consumption Effects," Econometrica, Econometric Society, vol. 72(1), pages 93-118, 01.
    8. Brock,W.A. & Durlauf,S.N., 2004. "Identification of binary choice models with social interactions," Working papers 2, Wisconsin Madison - Social Systems.
    9. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
    10. William A. Brock & Steven N. Durlauf, 2000. "Interactions-Based Models," Working Papers 00-05-028, Santa Fe Institute.
    11. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
    12. Epple, Dennis & Platt, Glenn J., 1998. "Equilibrium and Local Redistribution in an Urban Economy when Households Differ in both Preferences and Incomes," Journal of Urban Economics, Elsevier, vol. 43(1), pages 23-51, January.
    13. Patrick Bayer & Robert McMillan & Kim Rueben, 2004. "An Equilibrium Model of Sorting in an Urban Housing Market," NBER Working Papers 10865, National Bureau of Economic Research, Inc.
    14. Manski, C.F., 1990. "The Selection Problem," Working papers 90-12, Wisconsin Madison - Social Systems.
    15. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
    16. William A. Brock & Steven N. Durlauf, 2003. "Multinomial Choice with Social Interactions," NBER Technical Working Papers 0288, National Bureau of Economic Research, Inc.
    17. Yannis M Ioannides & Jeffrey E Zabel, 2002. "Interactions, Neighborhood Selection, and Housing Demand," Working Papers 02-19, Center for Economic Studies, U.S. Census Bureau.
    18. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
    19. Andrea Ichino & Armin Falk, 2003. "Clean evidence on peer pressure," Natural Field Experiments 00239, The Field Experiments Website.
    20. Herriges, Joseph A. & Kling, Catherine L., 1996. "Testing the Consistency of Nested Logit Models with Utility Maximization," Staff General Research Papers 1500, Iowa State University, Department of Economics.
    21. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
    22. Edward L. Glaeser & Jose A. Scheinkman, 1999. "Measuring Social Interactions," Harvard Institute of Economic Research Working Papers 1878, Harvard - Institute of Economic Research.
    23. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    24. Borsch-Supan, Axel, 1990. "On the compatibility of nested logit models with utility maximization," Journal of Econometrics, Elsevier, vol. 43(3), pages 373-388, March.
    25. Evans, William N & Oates, Wallace E & Schwab, Robert M, 1992. "Measuring Peer Group Effects: A Study of Teenage Behavior," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 966-91, October.
    26. de Bartolome, Charles A M, 1990. "Equilibrium and Inefficiency in a Community Model with Peer Group Effects," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 110-33, February.
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