Discrete Choice with Social Interactions and Endogenous Memberships

Giulio Zanella

Journal of the European Economic Association, 2007, vol. 5, issue 1, 122-153

Abstract: This paper is about selection of neighbors in models of social interactions. I study a general equilibrium model of behavior subject to endogenous social influences when heterogeneous individuals can choose whom to associate with, buying associations on a "memberships market". Social effects in behavior turn out to be a stratifying force: The desire for valuable interactions induces inefficient sorting and may lead to the endogenous emergence of "social traps" . The theory is then used to suggest identification strategies that may solve, in a microfounded way, identification and selection problems that typically affect empirical work on social interactions. Such strategies offer a viable alternative when valid instrumental variables or randomized experiments are not available. (JEL: C26, D85, Z13, Z19) (c) 2007 by the European Economic Association.

Date: 2007
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