Demand and Welfare Analysis in Discrete Choice Models with Social Interactions

90 Pages Posted: 7 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 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.

Suggested Citation

Bhattacharya, Debopam and Dupas, Pascaline and Kanaya, Shin, Demand and Welfare Analysis in Discrete Choice Models with Social Interactions (April 2019). CEPR Discussion Paper No. DP13707. Available at SSRN: https://ssrn.com/abstract=3383965

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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