Binary Outcomes and Linear Interactions

Vincent Boucher and Yann Bramoullé

No 2038, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Heckman and MaCurdy (1985) first showed that binary outcomes are compatible with linear econometric models of interactions. This key insight was unduly discarded by the literature on the econometrics of games. We consider general models of linear interactions in binary outcomes that nest linear models of peer effects in networks and linear models of entry games. We characterize when these models are well defined. Errors must have a specific discrete structure. We then analyze the models' game-theoretic microfoundations. Under complete information and linear utilities, we characterize the preference shocks under which the linear model of interactions forms a Nash equilibrium of the game. Under incomplete information and independence, we show that the linear model of interactions forms a Bayes-Nash equilibrium if and only if preference shocks are iid and uniformly distributed. We also obtain conditions for uniqueness. Finally, we propose two simple consistent estimators. We revisit the empirical analyses of teenage smoking and peer effects of Lee, Li, and Lin (2014) and of entry into airline markets of Ciliberto and Tamer (2009). Our reanalyses showcase the main interests of the linear framework and suggest that the estimations in these two studies suffer from endogeneity problems.

Keywords: binary outcomes; linear probability model; peer effects; econometrics of games (search for similar items in EconPapers)
JEL-codes: C31 C35 C57 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ecm, nep-gth, nep-net and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Binary Outcomes and Linear Interactions (2020)
Working Paper: Binary Outcomes and Linear Interactions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2038

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