A Roy Model of Social Interactions

60 Pages Posted: 14 Mar 2011 Last revised: 23 Mar 2011

See all articles by Steve Cicala

Steve Cicala

University of Chicago

Roland G. Fryer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); American Bar Foundation; University of Chicago

Jörg L. Spenkuch

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2011

Abstract

We develop a Roy model of social interactions in which individuals sort into peer groups based on comparative advantage. Two key results emerge: First, when comparative advantage is the guiding principle of peer group organization, the effect of moving a student into an environment with higher-achieving peers depends on where in the ability distribution she falls and the effective wages that clear the social market. In this sense our model may rationalize the widely varying estimates of peer effects found in the literature without casting group behavior as an externality in agents' objective functions. Second, since a student's comparative advantage is typically unobserved, the theory implies that important determinants of individual choice operate through the error term and may, even under random assignment, be correlated with the regressor of interest. As a result, linear in means estimates of peer effects are not identified. We show that the model's testable prediction in the presence of this confounding issue-an individual's ordinal rank predicts her behavior, ceteris paribus-is borne out in two data sets.

Suggested Citation

Cicala, Steve and Fryer, Roland G. and Spenkuch, Jörg L., A Roy Model of Social Interactions (March 2011). NBER Working Paper No. w16880. Available at SSRN: https://ssrn.com/abstract=1784157

Steve Cicala (Contact Author)

University of Chicago ( email )

1155 East 60th Street
Chicago, IL 60637
United States

HOME PAGE: http://home.uchicago.edu/~scicala

Roland G. Fryer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

American Bar Foundation

750 N. Lake Shore Drive
Chicago, IL 60611
United States

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Jörg L. Spenkuch

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://jspenkuch.github.io

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