Demand and Welfare Analysis in Discrete Choice Models with Social Interactions

88 Pages Posted: 17 Jun 2019

See all articles by Debopam Bhattacharya

Debopam Bhattacharya

University of Cambridge

Pascaline Dupas

Stanford University

Shin Kanaya

Aarhus University

Multiple version iconThere are 3 versions of this paper

Date Written: June 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.

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Suggested Citation

Bhattacharya, Debopam and Dupas, Pascaline and Kanaya, Shin, Demand and Welfare Analysis in Discrete Choice Models with Social Interactions (June 2019). NBER Working Paper No. w25947. Available at SSRN: https://ssrn.com/abstract=3405134

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 ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

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