Demand and Welfare Analysis in Discrete Choice Models with Social Interactions
Many real-life settings of consumer-choice involve social interactions, causing targeted policies to have spillover-effects. This paper develops novel empirical tools for analyzing demand and welfare-effects of policy-interventions in binary choice settings with social interactions. Examples include subsidies for health-product adoption and vouchers for attending a high-achieving school. We establish the connection between econometrics of large games and Brock-Durlauf-type interaction models, under both I.I.D. and spatially correlated unobservables. We develop new convergence results for associated beliefs and estimates of preference-parameters under increasing-domain spatial asymptotics. Next, we show that even with fully parametric specifications and unique equilibrium, choice data, that are sufficient for counterfactual demand-prediction under interactions, are insufficient for welfare-calculations. This is because distinct underlying mechanisms producing the same interaction coefficient can imply different welfare-effects and deadweight-loss from a policy-intervention. Standard index-restrictions imply distribution-free bounds on welfare. We illustrate our results using experimental data on mosquito-net adoption in rural Kenya.
We are grateful to Steven Durlauf, James Heckman, Xenia Matschke, Gautam Tripathi, and seminar participants at the University of Chicago and the University of Luxembourg for helpful feedback. Bhattacharya acknowledges financial support from the ERC consolidator grant EDWEL; the first outline of this project appeared as part b.3 of that research proposal of March 2015. Part of this research was conducted while Kanaya was visiting the Institute of Economic Research, Kyoto University (under the Joint Research Program of the KIER), the support and hospitality of which are gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.