Demand and Welfare Analysis in Discrete Choice Models with Social Interactions

87 Pages Posted: 14 Feb 2018 Last revised: 3 May 2019

See all articles by Debopam Bhattacharya

Debopam Bhattacharya

University of Cambridge

Pascaline Dupas

Stanford University

Shin Kanaya

Aarhus University - Department of Economics; Aarhus University - CREATES

Multiple version iconThere are 3 versions of this paper

Date Written: April 28, 2019

Abstract

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.

Keywords: Binary Choice, Social Interaction, Spillover, Hicksian Welfare, Compensating Variation, Identification, Bounds

JEL Classification: C25, C31

Suggested Citation

Bhattacharya, Debopam and Dupas, Pascaline and Kanaya, Shin, Demand and Welfare Analysis in Discrete Choice Models with Social Interactions (April 28, 2019). Available at SSRN: https://ssrn.com/abstract=3116716 or http://dx.doi.org/10.2139/ssrn.3116716

Debopam Bhattacharya (Contact Author)

University of Cambridge ( email )

Sidgwick Site
Austin Robinson Building
Cambridge, CB3 9DD
United Kingdom

Pascaline Dupas

Stanford University ( email )

Stanford, CA 94305
United States

Shin Kanaya

Aarhus University - Department of Economics ( email )

University Park
DK-8000 Aarhus C
Denmark

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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