Discrete Choice with Endogenous Peer Selection

TL;DR

This paper introduces a continuous-time discrete choice model where peer influence is endogenous, showing how peer selection based on previous choices impacts preferences and can be identified without exogenous variation.

Contribution

It develops a novel model of peer effects with endogenous peer selection and provides nonparametric identification of preferences and peer mechanisms.

Findings

Model characterizes equilibrium peer influence behavior

Preferences and peer selection mechanisms are identified nonparametrically

Variation in choices and peer set size enables recovery of key parameters

Abstract

We develop a continuous-time peer-effect discrete choice model where peers that affect the preferences of a given agent are randomly selected based on their previous choices. We characterize the equilibrium behavior and study the empirical content of the model. In the model, changes in the choices of peers affect both the set of peers the agent pays attention to and her preferences over the alternatives. We exploit variation in choices coupled with variation in the size of the set of potential peers to recover agents' preferences and the peer selection mechanism. These nonparametric identification results do not rely on exogenous variation of covariates.