Heterogeneity in peer effects for binary outcomes

TL;DR

This paper develops a structural model to analyze heterogeneous peer effects in binary outcomes, such as smoking and drinking among students, highlighting the importance of accounting for individual differences in conformity preferences.

Contribution

It introduces a novel framework for identifying and testing heterogeneous peer effects in network settings with binary outcomes, extending previous homogeneous models.

Findings

Heterogeneity significantly affects peer effect estimates.

The proposed tests distinguish conformity from spillover effects.

Ignoring heterogeneity biases the estimated peer influence.

Abstract

I introduce heterogeneity into the analysis of peer effects that arise from conformity, allowing the strength of the taste for conformity to vary across agents' actions. Using a structural model based on a simultaneous network game with incomplete information, I derive conditions for equilibrium uniqueness and for the identification of heterogeneous peer-effect parameters. I also propose specification tests to determine whether the conformity model or the spillover model is consistent with the observed data in the presence of heterogeneous peer effects. Applying the model to data on smoking and alcohol consumption among secondary school students, I show that assuming a homogeneous preference for conformity leads to biased estimates.