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Simulation-based estimation of peer effects

  • Brian Krauth

    (Simon Fraser University)

The influence of peer behavior on an individual's choices has received renewed interest in recent years. However, accurate measures of this influence are difficult to obtain. Standard reduced-form methods lead to upwardly biased estimates due to simultaneity, common shocks, and nonrandom peer group selection. This paper describes a structural econometric model of peer effects in binary choice, as well as a simulated maximum likelihood estimator for its parameters. The model is nonparametrically identified under plausible restrictions, and can place informative bounds on parameter values under much weaker restrictions. Monte Carlo results indicate that this estimator performs better than a reduced form approach in a wide variety of settings. A brief application to youth smoking demonstrates the method and suggests that previous studies dramatically overstate peer influence.

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Paper provided by EconWPA in its series Econometrics with number 0408002.

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Length: 40 pages
Date of creation: 02 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0408002
Note: Type of Document - pdf; pages: 40
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