A new spatial (social) interaction discrete choice model accommodating for unobserved effects due to endogenous network formation

This paper formulates a model that extends the traditional panel discrete choice model to include social/spatial dependencies in the form of dyadic interactions between each pair of decision-makers. In addition, the formulation accommodates spatial correlation effects as well as allows a global spatial structure to be placed on the individual-specific unobserved response sensitivity to exogenous variables. We interpret these latter two effects, sometimes referred to as spatial drift effects, as originating from endogenous group formation. To our knowledge, we are the first to suggest this endogenous group formation interpretation for spatial drift effects in the social/spatial interactions literature. The formulation is motivated in a travel mode choice context, but is applicable in a wide variety of other empirical contexts. Bhat’s (Transp Res B 45(7):923–939, 2011) maximum approximate composite marginal likelihood (MACML) procedure is used for model estimation. A simulation exercise indicates that the MACML approach recovers the model parameters very well, even in the presence of high spatial dependence and endogenous group formation tendency. In addition, the simulation results demonstrate that ignoring spatial dependence and endogenous group formation when both are actually present will lead to bias in parameter estimation. Copyright Springer Science+Business Media New York 2015