NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Bet Caeyers

Institute for Fiscal Studies
London
United Kingdom

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Institute for Fiscal Studies

NBER Working Papers and Publications

August 2016Exclusion Bias in the Estimation of Peer Effects
with Marcel Fafchamps: w22565
We formalize a noted [Guryan et al., 2009] but unexplored source of bias in peer effect estimation, arising because people cannot be their own peer. We derive, for linear-in-means models with non-overlapping peer groups, an exact formula of the bias in a test of random peer assignment. We demonstrate that, when estimating endogenous peer effects, the negative exclusion bias dominates the positive reflection bias when the true peer effect is small. We discuss conditions under which exclusion bias is aggravated by adding cluster fixed effects. By imposing restrictions on the error term, we show how to consistently estimate, without the need for instruments, all the structural parameters of an endogenous peer effect model with an arbitrary peer-group or network structure. We show that, under ...
 
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